Interactive Investor - Why we’re upping exposure to US shares

In part two of our video interview, Smithson fund manager Simon Barnard explains that around a third of the shares in the current portfolio were selected around seven years ago when it raised the largest sum of money for a UK-domiciled investment trust in its initial public offering (IPO). Barnard discusses some of the long-term compounders he retains plenty of conviction in.
He also outlines his investment approach, runs through how he decides what to invest in from a universe of 10,000 global businesses, and recent portfolio activity, as well as explaining how a lesson learnt at university stopped him making changes to the portfolio during the US tariffs turmoil.
Kyle Caldwell, funds and investment education editor at interactive investor: Hello, and welcome to our latest Insider Interview. Today in the studio, I’m joined by Simon Barnard, manager of the Smithson Investment Trust Ord. Simon, thank you for coming into our studio today.
Simon Barnard, manager of Smithson Investment Trust: Hi Kyle, thank you for having me on.
Kyle Caldwell: So Simon, let's start off with your investment strategy and approach. So, Smithson Investment Trust invests in high-quality, mid and small-cap global businesses. You've got around 10,000 companies to choose from. So, how do you narrow down that huge amount of choice?
Simon Barnard: Well, we take a very long-term view in the companies that we look at. So, primarily, as you mentioned, we look at very high-quality, but also growing, companies. What do we mean by high quality? Those with strong margins, great free cash flow generation, and high returns on invested capital.
But what's important for us is that those metrics are sustained over time, over the very long term. And what we need to look at to determine that is a competitive environment. So, that's really the most important thing, because if the competitive environment is benign, then we know substantially they'll be able to maintain those returns. But if it's very aggressive, then they'll probably be eroded over time.
Now, how do we find these very high-quality and growing companies? Well, we use many different ways. We've got a team of analysts scouring the globe for these companies and there are about 10,000 to choose from. So, typically, they start by using financial screens and then do deep-dive research on anything that looks interesting from there.
But to be honest, sometimes you just get lucky. Around a year ago, I went to a conference and stumbled into a presentation from a company I'd never heard of. It was called NAPCO Security Technologies Inc. I liked what I heard so much, after a series of successive meetings with the company that by now, we're ending up roughly as their fourth-biggest shareholder. So, sometimes you never know where it's going to come from.
Kyle Caldwell: And you like to invest in companies for the long term in order for their value to compound over time. So, Smithson launched in October 2018. Could you provide some examples of companies you’ve held from the early days?
Simon Barnard: Actually about a third of the portfolio is still in the same stocks that it was seven years ago. So, we still have conviction in quite a lot of those stocks but [there’s] a couple that I would mention. One is perhaps MSCI Inc.
This is the US-based provider of indices and benchmarking data. Many will know it through passive investing, which has been a great tailwind for them over the years. It’s a very steady compounder because now it is also going into thematic investing such as sustainability or, more recently, private assets.
So, that’s been a great performer for us, but actually our best performer over that period has been Diploma. This is a UK-based company, but it’s a very decentralised specialist distributor of industrial products, anything from gaskets for engines to Formula One components.
Really, the beauty of this business is decentralisation, because what that ultimately means is it owns well over 50 individual companies, and each of those are able to go out into their respective markets and keep adding bolt-ons or small company acquisitions to their own, such that while the organic growth of Diploma’s probably only mid-single digit over the long term, 4%, 5%, 6%, what they’re able to do is add another 4%, 5%, 6% of growth through bolt-on acquisitions. A lot of these acquisitions are very low risk because they’re very small from their subsidiary companies. So, that’s actually now our largest position in the fund, having done so well.
Kyle Caldwell: Your investment approach is to focus on the company fundamentals rather than trying to predict wider macroeconomic movements. However, you have had a lot of macroeconomic headwinds to contend with. In recent years we’ve seen interest rates rise in the UK from rock-bottom levels to peak at 5.25%. This was a headwind for smaller companies as investors dialled down on risk. Now that interest rates are falling, is this turning a headwind into a potential catalyst for the area of the market that you invest in?
Simon Barnard: Yes, it might do. You’re absolutely right, the increase in interest rates since 2021-22 has been a significant headwind to small caps, and our strategy in particular, because we look at high-quality growing small-cap companies, which have been doubly hit by the longer duration interest rates going up. So, I’m talking about the interest rates on 30-year gilts or US bonds.
We have to be a little bit careful about how we define interest rates because when we take the Federal Reserve funds rate or the UK base rate, which is certainly falling now, that typically tends to affect the shorter-term interest rates. So, to put that into context, the US two-year bond rate has come down by about one percentage point since the end of 2022.
But what typically affects us more is the longer bond yields. So, if we look at a US 30-year bond yield, that has gone up around one percentage point since 2022. So, we have to define that. But of course, if that long bond yield were to start falling, that would be a big benefit to our strategy.
Kyle Caldwell: Another macroeconomic headwind has been US tariffs, which have been dominating the headlines so far in 2025. Have there been any companies within your portfolio that have been impacted by US tariffs? If so, have you made any changes to the portfolio?
Simon Barnard: They have impacted some of our companies. So, initially when they were announced, we thought, funnily enough, the biggest impact would be on some of our medical device companies. Those include Ambu, and Fisher & Paykel Healthcare Corp Ltd
That’s because they tend to produce their medical products in Mexico and Asia and ship them into - what they have is quite a large US business. But because of the nature of their medical devices, actually those were covered by the United States-Mexico-Canada Agreement (USMCA), which is the old North American Free Trade Agreement (NAFTA).
So, actually, they could be shipped into the US free from tariffs. So, then we went to the next layer down and discovered some of our consumer companies like Clorox Co, for example, is actually likely to be worse hit than those medical device companies. Clorox have already said that the tariffs will typically cost them around $100 million (£74 million), which is just under 10% of profits for this year, as they are having to ship them in from outside the US.
It is also a bit tricky for Clorox because they supply household staples goods and clearly the one area of weakness that we have been observing over recent months is the lower-end US consumer. So, demand for those household staple goods will be impacted on top of that.
But, do you know, we haven’t made any outright changes to the portfolio on the back of this, primarily because of a lesson I learned from my first day of my economics degree at university. The lecturer put it like this, ‘If you have all of the window cleaning companies in the UK and they all suffer an elevated cost from higher minimum wage, what’s going to happen to their profits?’
The answer is very little because if they all suffered from the same cost, then they can all put up prices and no one will particularly suffer in terms of margin. So, that goes again to the competitive environment. If the competitive environment doesn’t change, i.e. everyone suffers in the same way, then ultimately what ends up happening is that they can all put up their prices and sadly all the additional costs fall on to the consumer.
And I think primarily in most of the markets we’re looking at, that is what’s occurring. In fact, many of our companies have already told us that they’ve put through what they call surcharges to their customers to cover the additional cost of tariffs.
Kyle Caldwell: Sticking with the US, I noticed that you’ve been increasing exposure to US companies. Could you explain why? Of course, at the moment, there’s no shortage of commentators predicting the potential end of US exceptionalism, and the US dollar has been weak in 2025. So, why have been increasing exposure to the US?
Simon Barnard: There are a lot of fears about the end of US exceptionalism. I don’t have a crystal ball, it might happen, it might not happen. So, that is a big uncertainty.
But what I do know is that the US remains a very attractive place to do business. It is a very large domestic market, which is important for our small and mid-cap companies because typically smaller companies rely more on their domestic market than international markets because, frankly, they haven’t expanded to a size where their growing to other markets yet.
And so for our small and mid-cap companies, the US is still a great place to find these opportunities. What I also know is that since that Liberation Day announcement by US President Donald Trump, a lot of our fantastically high-quality, fast-growing companies have come down significantly in valuations. So, that is a fact today.
Therefore, all we’ve simply been doing is taking advantage of that and adding companies. Which in some cases we’ve been following since inception seven years ago and never had the chance to buy, now at valuations that are attractive to us. So, that’s the reason it’s gone up. No real bet on what’s going to happen to US exceptionalism.
Kyle Caldwell: Could you provide one or two examples of US companies that you did add exposure to over the past couple of months?
Simon Barnard: Yes, Qualys Inc  is one, so this is a US-based cybersecurity company and it focuses on vulnerability detection and management. So, it puts very small agents on corporate networks which finds every asset connected to that corporate network and then remediates any patching that's required. So, automatically patches all those devices such that vulnerabilities are eradicated.
Now, this is increasingly important in a cloud computing environment because the network essentially grows exponentially. So, we don’t see any decrease in the required demand for that product. In fact, it’s growing quite rapidly. And yet, those share prices have become discounted in a weaker US market, so we took advantage of that.
Kyle Caldwell: As mentioned, you have a long-term investment approach. The portfolio turnover is around 25%. Is that higher than you would like it to be? And could you talk us through recent portfolio activity?
Simon Barnard: I don’t think 25% is a particularly high number in absolute terms. Most active managers on average are above the 60% or 70% annual turnover, so, it’s not high in absolute terms. Obviously we’d like it to be zero because that means we’re happy with everything and nothing’s changed, and we can just sit on it and allow it to compound in value.
But ultimately, and particularly in small cap, there are a few reasons why we find that we have to make some change in the portfolio, and those are really fourfold.
I’d say the first and most important one is when the management of these smaller companies, who tend to have quite a lot of power, make a strategic shift that we don’t agree with. That’s happened a couple of times to us. Masimo Corp  in the US is a good example. It still is a US medical device company, but they overnight decided to buy an audio equipment business, which we found very confusing and ultimately didn’t work very well. We sold out on the back of that.
Another good reason is if our small companies, which tend to focus on particular growing niches and markets, sometimes those niches and markets don't work out very well. So, sometimes we make a mistake on that and, clearly, it’s better to exit if we have done that, or if that market or niche has changed.
Third, small and mid-caps, as I’m sure everyone notices, typically have more volatile share prices than large caps. So, we tend to take advantage of that where we can.
We’ve just been discussing Liberation Day and the benefits valuation that was born out of that where we took advantage of that. But, on the flip side, a couple of the positions we sold this year simply got too expensive. They worked very well. One was Verisk Analytics Inc . This is a company we owned since inception, had been one of our best performers and only recently had reached a valuation that we no longer felt comfortable with. So, that was another reason to sell.
And, finally, we would typically sell if we find something better, which is a combination of all those factors. What you have to bear in mind is, in a closed-ended structure like a UK investment trust, ultimately if we do find something better than we already own in the portfolio, we’re going to have to sell something to raise the capital to buy something.
So, that 25% actually means that we have sold 12.5% of the portfolio to be able to buy 12.5% of portfolio into something else. So, when I describe it in that way, it actually doesn’t sound like a lot of activity in absolute terms.
A couple of new ideas that we’ve added to the portfolio, which are based in the US as it happens, Vertiv Holdings Co Class A . This is the leading provider of liquid cooling technology for AI-powered data centres. So, this clearly is in a growth market. It's currently growing at about 30%, which would typically actually put us off because obviously it would be a darling of the market and something that we would typically find too expensive.
However, in this case, after the Deep Seek revelation in January of the low-cost Chinese AI model, a lot of these AI-based suppliers fell quite precipitously in share price and Vertiv itself was down 60%. It was actually on the back of that move that we decided to pick up what was a very attractive growing business at [what is] now a very interesting multiple. Interestingly, it has since bounced, so it’s less cheap than it was, but it’s done well for us in the meantime.
Another new company was NAPCO Security Technologies. This is the one that I discovered at an investor conference. They produce security technologies such as panels, alarms, both fire and burglar, and remote locking systems. This is quite an interesting company because, over time, since about 2018, they have increasingly sold alarms and remote locking systems which carry a recurring revenue to keep them connected to the cloud.
It’s gone from a pure equipment business, which only had a gross margin of about 25%, to now about half their revenues, recurring revenues, and that carries a 90% gross margin. So, you might imagine that the economics of the whole business has transformed dramatically over the last few years, and that part of the business is the one that’s growing quickest. So again, we see a lot of opportunity for that company in the future.
Kyle Caldwell: Simon, thank you very much for your time today.
Simon Barnard: Thank you, Kyle.