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The Smithson investment trust raised an impressive £822.5m on its market debut, 3x its initial target. This has been a consistent top seller across all fund platforms and a great option for investors. However, the group’s investment style (which looks for high quality, high growth companies) has been in favour a long time and there is a question mark over whether that can last indefinitely. What do the experts think?
“The pull of the Fundsmith name is very strong, making it the largest ever Investment Trust launch. This shows that the cult of the star fund manager remains very much alive with people anchoring to individuals with strong track records to their name. Whether that is the right thing is another matter and I hope that this isn’t just a case of those investors who already own the Fundsmith Equity fund simply doubling up their exposure.
“Investors should never invest in anything purely because of the hype and should go into every holding with a detailed understanding of the underpinning investment philosophy and process. I would hope that all investors have read the ‘Owner’s Manual’ that sets out very clearly how they invest as this should give an important frame of reference to understand what type of performance can be expected.
“The investment approach of Smithson follows that of the open ended fund and therefore we can assume that the performance characteristics will be similar. Fundsmith favours high quality companies and look to hold them for a long time to let them compound. In recent years this has been a winning strategy but it should be remembered that no investment style can outperform all of the time. Should there be a sharp correction or the market rotates towards value stocks, then the performance of this trust along with the other Fundsmith funds will likely lag the market.”
“The Smithson trust will focus on small and medium-sized companies, which are a good source of long term growth for investors who are willing to ride out the ups and downs of the asset class. These companies are also a fertile hunting ground for active managers, because their potential can often go unnoticed by the market at large. The global scope of the fund gives the fund managers a wide universe of stocks to choose from, which is whittled down through screening and fundamental analysis to deliver a concentrated portfolio of high conviction investments.
“The managers of Smithson Investment Trust have a relatively limited track record of running money, though Terry Smith will be on hand to lend expertise and oversee matters, and they will also be using an investment process which has served Fundsmith well in the large cap space - looking for quality companies with good growth prospects, trading at a reasonable price.
“The trust is currently trading at a premium which means investors are paying more than the value of the portfolio to buy in, though if the premium is maintained then when they sell out the same will apply. It’s still early days though, so as yet there’s little historical data to build a picture of what premium or discount the trust may typically trade at. Generally speaking, premiums and discounts on investment trusts can be expected to widen and narrow with sentiment, and therefore act as an additional source of volatility for closed-ended investors to consider.”
“This is a very interesting proposition as the Fundsmith investment process and philosophy is very clear-cut and easily defined, which lends itself to replication in other areas of the market. The focus on a simple strategy is going to help the managers narrow down on the investment opportunities and as such have been able to get the fund nearly fully invested already.
This trust is going to be riskier than the Fundsmith fund and will have the potential to suffer if there is volatility in markets or investors switch from growth to a value approach. However, like the Fundsmith parent trust this fund is suitable for long term investors and does access the robust process and detailed company analysis which Terry Smith has a reputation for. It will offer a different way of getting global equity exposure for investors.”
Be wary of a hyped investment. If it’s really popular, it can mean it’s about to flop. Technology bubble anyone? FundSmith is a classy business, with a good track record, but it has had a tailwind because its investment style has been in favour. £822m is pretty big for a smaller companies fund and the fund trades at a ‘premium’, which means you’re actually paying more for the trust than the underlying holdings are worth. We might be tempted to look at trusts such as Aberforth Smaller Companies or BlackRock Smaller Companies, which have been going longer and aren’t as hyped.
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