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.