Smithson churns half its portfolio in bid to improve performance

The investment trust from Terry Smith’s investment firm lost more than a third of its value last year. 

Fundsmith’s global smaller companies investment trust, Smithson, turned over 48.5% of its portfolio last year as it battles to improve performance in response to the “growth” shares it invests in falling sharply in value. This compares with changing just 9.5% of its portfolio in 2021.

Simon Barnard, manager of the trust, purports to stick with Terry Smith’s mantra of buying good companies, not overpaying, and then doing nothing. However, 2022 was a landmark year for trading activity because of how volatile prices were for the “high-quality” shares Barnard likes to buy.

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Barnard said: “Regarding the final step, do nothing, it must be noted that as share prices were volatile throughout the year, trading activity increased significantly as we set out to take advantage of buying new positions or increasing existing ones at lower valuations.”

In 2022, the Smithson share price dropped 35.2% and the net asset value (NAV) of its companies fell 28.1%. For comparison, the MSCI World Small and Mid Cap Index declined 8.7%.

Since launch in 2018, its share price is up 30.8% compared with 34.9% for its benchmark index, although the NAV returns are higher at 41.1%.

Barnard says that while churning nearly half the portfolio seems like a lot, according to fund data group Morningstar the average turnover for actively managed equity funds is above 60% and was 86% in 2020.  

Barnard’s key buys last year included luxury brand Moncler and high-tech manufacturers Addtech and IDEX.

Moncler, the Italian clothing company which designs and produces high-end branded apparel, traces its roots back to 1952 and the invention of down-filled mountaineering coats. Shares fell around 20% in 2022 but staged a recovery from June. Smithson bought shares near the lows, which meant it was a positive contributor to returns last year.

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Addtech, based in Sweden, has 140 subsidiaries and 3,000 employees grouped into five industrial business areas including industrial process, energy, automation, components and power solutions. Its origins date back to 1906 and it has had the same business concept for more than 100 years. Shares fell around 30% last year.

“We can therefore be confident in its strategy over the next decade at least,” Barnard said.

IDEX is another decentralised industrial conglomerate that grows through small acquisitions, such as pumps, meters and systems for high-value materials and high-precision instrumentation for health and science industries. Shares were flat last year but fell 25% by the summer before recovering.

Smithson also sold three large positions last year: US-based boiler and heater manufacturer AO Smith, fast-food chain Wingstop, and Ansys, a US company producing simulation software.

The changes mean that Smithson now has less invested in technology shares compared with last year, at 38% versus 44%.

Barnard said: “Information technology now has a lower weighting, mostly due to the sale of Ansys. As we say every year, while the IT weighting appears large, we do not think of ourselves as running a ‘tech fund’, because this is an MSCI defined sector which includes a number of diverse businesses and end markets.”

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Did the portfolio changes add extra fees?

Despite the extra activity last year, additional fees to investors did not increase substantially.

Smithson reported that the costs of dealing, including taxes, amounted to 0.03% of NAV in the period, slightly higher than the 0.02% incurred in 2021.

Barnard said: “This may seem odd given there was much more discretionary turnover this year, but the reason is that the overall turnover of the fund, including the investment of the proceeds from share issuance, which was very limited in 2022, was not that much higher than in 2021.”

The ongoing charge figure (OCF) was 0.9% of NAV in 2022 compared to 1% in 2021. Combined with trading fees, this means the total investment cost was 0.93%.