Fundsmith’s Smithson investment trust has underperformed the reference index for the first time since its inception.
In a stock exchange announcement today (August 9), the trust said in the first half of 2021, the net asset value per share of the company increased by 5.9 per cent and the share price increased by 4.1 per cent.
However, over the same period, its reference index, the MSCI World SMID Index, increased by 12.4 per cent.
Smithson shares traded at an average premium of 2.3 per cent in the first half of the year and a total of 18.7m new shares in the company were issued, for net proceeds of £311.2m, which were invested both in existing holdings and two new positions. New shares were only issued at a premium to NAV.
Simon Barnard, investment manager at Fundsmith, explained that as markets were much calmer in the first half of 2021 compared to the tumultuous period last year, trading activity fell sharply, which in turn meant that discretionary portfolio turnover, excluding the investment of proceeds from new shares issued, was just 2.3 per cent for the period, compared to 20 per cent last year.
However, costs were also lower, with an ongoing going charges figure of 1 per cent, including the annualised management fee of 0.9 per cent, compared with 1.01 per cent last year.
Barnard said: “The MSCI World SMID Index rose steadily throughout the period but the companies we own did not keep pace.
"We believe this is for a couple of reasons. Primarily, the combination of a resurgence in economic growth combined with very loose fiscal and monetary policy led many market participants to expect a sharp acceleration in inflation, perhaps even to uncontrollable levels.
“This would, should it occur, lead to a meaningful increase in the level of interest rates set by central banks, and indeed, led to a sharp rise in US 10 year treasury yields from 0.9 per cent in January to a peak of 1.7 per cent in March.
“This, in theory, reduces the value of higher rated growth companies, such as those owned in the portfolio, because the future earnings of these companies would have a lower perceived value today, once discounted back at the higher interest rates. More lowly rated companies, that don't grow as fast, have less of their earnings in the future to discount, and so are less affected by this phenomenon.”
But Barnard emphasised that inflation itself would likely not cause a significant problem for the trust's companies as they tended to have low input costs, and subsequently high gross margins, as well as low capital requirements, allowing them to generate high returns on capital.
He said: “As inflation will affect both the cost of raw materials and the cost of plant and equipment, those that spend less as a proportion of revenue on these items will be less impacted. On top of this, the market structure and competitive positioning for many of our companies mean that they would also be in a position to raise prices charged to their customers should the costs of the business increase.
“We therefore believe that a period of higher inflation is not a situation to be feared in terms of business fundamentals.”
He added: “The second issue, somewhat linked, is that in a world with resurgent growth, investors are less willing to pay high valuations for companies that can grow consistently through good times and bad, such as those in our portfolio.
“Instead, they buy 'cheap' or 'value' companies, because they will also grow in this improving environment - as the saying goes, a rising tide lifts all boats. This meant that such 'value' companies did relatively better in the first half than the types of companies we own.”
Barnard stressed to shareholders that the underperformance was predominantly due to the macroeconomic factors and there were no serious underlying issues with any of the companies it owns.
The trust in turn added two new companies to the portfolio in the first half, namely US based pest control Rollins and fast-growing franchised chicken wing restaurant Wingstop.
It also sold one company during the period, a biotechnology business based in the UK, called Abcam as the company has been undergoing a change in strategy over the last couple of years, which it said was set to continue for some time.
Earlier this year Smithson investment trust issued shares worth £60m as the trust battled to keep its premium down.
A series of stock exchange announcements between December 7, 2020 and January 5, 2021 showed the trust had issued 3.6m new shares, priced between £16.26 and £17.34 a share, a move that brought £59.7m of new investment to the trust.
In today's results it said it would continue to issue new shares and continue to seek attractive investment opportunities for any further capital raised.
Since the year end, the trust saw further gains across its portfolio and as at August 5, 2021, the company NAV had risen a further 6.2 per cent to £18.55 whilst the share price had risen a further 6.3 per cent to £18.92.
The market capitalisation now exceeds £3bn, the company's chairman Mark Pacitti said.
sonia.rach@ft.com
