Great start

Don’t mistake me for some kind of stock market masochist. No one actually enjoys seeing the value of the biggest holding in their Self-Invested Personal Pension (SIPP) fall by a double-digit percentage. In fact, Smithson’s decline has the potential to hurt more than most. given that investors like me have been spoiled by performance for the majority of its existence. 

The small- and mid-cap-focused fund was launched back in October 2018. No doubt helped by its link to star money manager Terry Smith (Smithson comes from the Fundsmith stable and adopts the same strategy), investors were queueing up to throw their money in the ring. And up until recently, this confidence has been richly rewarded. 

From inception to the end of 2021, the trust delivered an annualised gain of 24.5%. That compares very favourably to the 13% achieved by its benchmark — the MSCI World SMID Index. It also more than justified the 0.9% annual management charge, in my opinion.

What’s gone wrong?

The recent wobble may be due to a number of things. First, there’s the issue of valuation. As a quality-focused fund, Smithson doesn’t look for cheap stocks.

Like its big brother, Fundsmith Equity, it targets companies with valuable brands and huge market shares that generate consistently high returns on the money they put to work. This includes property website Rightmove, mixer-drinks supplier Fevertree Drinks and Domino’s Pizza Group. Unfortunately, such businesses are rarely without friends and priced accordingly. That’s fine when markets are behaving themselves. Less so when investors are fretting over earlier-than-expected interest rate rises.

The fact that almost half of Smithson’s portfolio comes from the IT sector probably doesn’t help either. By sharp contrast to last year, companies in this space have now fallen out of favour. Thankfully, Smithson makes a point of avoiding the unprofitable fluff whose share prices are now falling faster than Boris Johnson’s approval ratings. Nevertheless, investors seem to be throwing the baby out with the bathwater.

The aforementioned performance of its shares may have also seen a few profit-takers emerge from the shadows. After all, Smithson’s market-cap had grown to £3.5bn by the end of December. That’s already pretty large for a trust that is designed to invest in companies lower down the food chain. In fact, the median size of business in the portfolio is actually £10bn! Moreover, manager Simon Barnard’s investment strategy is still to be comprehensively tested and some people may be getting out while the going’s good.

Loading up for the recovery

While I wouldn’t mind being proven wrong, I certainly don’t expect Smithson’s annualised return to remain at the percentage it stood at in December. As a fuss-free way of accessing high-quality businesses from around the developed world however, it still strikes me as a perfect core holding.

I believe that good businesses tend to outlive bad ones. I also regard myself as a long-term growth investor. As such, it makes sense for me not to panic about Smithson’s sticky patch just yet.

The post Top investment trust Smithson is flagging and I’m buying appeared first on The Twelfth Magpie.

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• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Smithson Investment Trust and Fundsmith Equity. The Motley Fool UK has recommended Dominos Pizza, Fevertree Drinks, and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As the manager of what’s become the UK’s most popular fund (Fundsmith Equity), Terry Smith has helped to increase the wealth of many thousands of investors, including himself. As someone who picks my own stocks, I regularly draw on simple but powerful tips from the celebrated money manager. Here’s a small selection. 

Don’t just buy what’s cheap

Terry Smith’s experience tells him that investors obsess over price. Indeed, he frequently mentions wishing he’d kept a diary since he started his career in 1974. This would have two columns — one for whenever someone asked him whether a stock was cheap and one for if it was a good company. Smith believes that he would have “overwhelmingly” more ticks in the first column than the second. 

This is not to say that Smith thinks the price of a stock is irrelevant. No one wants to overpay if they can avoid it. For him, however, “it’s not the most important question“. Instead, he favours looking at the quality of a business first. One way of doing this is to look at its return on capital employed (ROCE).

Taking this on board, I’ve become a little less interested in valuation over the years and more interested in ROCE. I’ve already done well out of stocks like trading platform IG Group, laser-guided equipment manufacturer Somero Enterprises, kettle safety component supplier Strix and food-on-the-go retailer Greggs. All of these consistently generate high returns on capital (outside of a pandemic). 

This is not to say that Terry Smith would buy these stocks. Nor is blindly buying businesses with high ROCE a guaranteed route to riches. Some I’ve owned have performed woefully. Nevertheless, I’m confident that my winners now outnumber my duds. And over an investment career, that’s what matters.

Don’t time the market

Given his stellar investment returns, one would assume that Terry Smith is rather skilled at timing the market: buying at the bottom and selling at the top. However, he’s very much against trying to do so. As he frequently reflects during speeches, there are “only two types of people I’ve ever met in investment: those who can’t do [time the market] and those that don’t know they can’t do it“.

However, this doesn’t stop Smith from buying on short-term weakness. He snapped up US coffee chain Starbucks and sportswear and trainer maker Nike during last year’s market crash. But these are quality stocks that were already on his radar.

This is why I’m continuing to push money into Smithson Investment Trust — a fund run by his colleagues. This adopts an identical strategy to Fundsmith but focuses on companies lower down the market spectrum. Smithson’s performance has been superb and I might be tempted to take profit. However, I’m continuing to buy nearly every month. Why? I simply don’t know when markets will sink.

I also try to keep my costs as low as possible. After all, there’s only one certainty with frequent buying and selling: it costs money. So, like Fundsmith Equity, I try to have a very low turnover of stocks. Unless I spot something I really don’t like (or spot a great opportunity), I don’t deal very often.

As Terry Smith has reflected, “over the long term, it’s what the company does that makes money, not what you do“.

The post These tips from millionaire Terry Smith are boosting my stock market returns appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Fundsmith Equity, Greggs, Somero Enterprises, Inc, Strix, IG Group and Smithson Investment Trust. The Motley Fool UK owns shares of and has recommended Nike and Starbucks. The Motley Fool UK has recommended Somero Enterprises, Inc. and has recommended the following options: short October 2021 $120 calls on Starbucks. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Smithson Investment Trust (LSE: SSON) is now the biggest holding in my SIPP (Self-Invested Personal Pension). That’s despite it significantly underperforming its benchmark over the first half of 2021. Let me explain why.

What’s Smithson all about? 

For those unfamiliar with Smithson, it’s a FTSE 250-listed trust that’s been around since October 2018. It invests in small- and mid-cap companies from around the world, adopting an identical strategy to its stablemate Fundsmith Equity.

Like its big brother, Smithson aims to find great companies, buy them at a reasonable price, and then kick back. Sadly, such businesses are fairly rare, at least according to manager Simon Barnard. A portfolio of just 32 investments shows how selective he is.  

Unfortunately, this strategy hasn’t worked as well of late. Last week’s half-year report confirmed that Smithson Investment Trust had underperformed in the first six months of 2021. The share price total return was 4.1%. This was less than a third of that achieved by its benchmark (the MSCI World Small and Mid Cap Index). The latter rose 12.4%.

So, why am I so bullish? It’s a fair question, especially as employing an active manager also means paying fees. Here’s my reasoning.

1) Underperformance is inevitable

Just as no share price rises in a straight line, no investment strategy works every day/month/year. While tech stocks performed incredibly in 2020, we know that value plays were the winners in the early part of 2021. As vaccination programmes progress, this trend could continue into 2022. Or it may stop — we simply don’t know.

Since I can’t time the markets for toffee, it makes more sense to align myself to a strategy that I can see myself sticking to. For me, this is the quality-focused approach championed by Smithson and something I try to apply to my own stock screening. To paraphrase billionaire investor Warren Buffett, I’d prefer to snap up an awesome business at a fair price than something that just looks ‘cheap’.

2) Exposure to small-cap winners

As someone who hopefully has several decades left in the market, I want to be sure I’m backing stocks (and funds) that are capable of really growing my cash. For me, this means avoiding much of the FTSE 100 and S&P 500 and looking lower down the market spectrum.

Defintitions of ‘small-cap’ and ‘mid-cap’ vary around the world (Smithson’s average market-cap is actually £11.3bn!). Nevertheless, what’s important here is holding businesses that have a good chance of growing earnings at a faster clip than your typical market giant.

Such an approach carries risk. While some research has shown that returns from smaller stocks have been better historically, this has been at the expense of considerable volatility. That’s important to remember if we have another market wobble.

3) Track record

This last point is key. Despite recent performance, Smithson has still managed to deliver a staggering annualised return of 25.1% since inception to the end of July. The aforementioned benchmark managed ‘just’ 13%. 

Now, can Smithson sustain this sort of return over many years? I doubt it. As such, I’ve already prepared myself to expect a moderation in performance as time goes by. I’m also still sufficiently diversified elsewhere. Having conviction is one thing, but assuming that past performance must predict the future is the ultimate investing folly. 

Even so, I can’t see Smithson Investment Trust losing its top spot soon.

The post ‘Underperforming’ Smithson Investment Trust is now my biggest holding appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Smithson Investment Trust and Fundsmith Equity. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Aside from the valuations of holdings such as Tesla taking a (long overdue) tumble, SMT has faced another recent setback in the announcement that co-manager James Anderson will be retiring.

As a long-term investor, however, I’ve been buying more of the investment trust in May. Here’s why.

Disruption…on the cheap

While the departure of Anderson is a shame, it’s not a complete surprise. A 21 year-stint (22 by the time he actually leaves) is a long time to manage the same fund. The need for fresh blood and new investment ideas is both inevitable and healthy. Notwithstanding this, I’m reassured that Scottish Mortgage Investment Trust’s other manager, Tom Slater, is staying put. This should make the eventual succession process a lot smoother.  

SMT’s low ongoing charge (0.36%) also remains a big pull for me. This is a very cheap way of getting access to some of the most disruptive growth stocks in the world. It’s even on par with many passively-managed exchange-traded funds. Personally, I’m a big fan of having both active and passive elements to my portfolio so long as the fees charged by the latter can be justified. I don’t think this has ever been a problem when it comes to the Scottish Mortgage Investment Trust. It’s climbed 359% in value over the last five years.

Sure, there’s no guarantee that the share price won’t continue to wobble. Concerns over inflation mean that risky, ‘blue sky’ stocks might remain out of favour. Many investors will also be looking to capitalise on reopening opportunities as vaccination programmes make an impact. Previously out-of-favour sectors such airlines, pub chains and high street retailers are back on buy lists.

On this front, I’m taking a balanced approach. Some of my money is invested in stocks that I think could benefit from a return to normality. But sell my holding in a trust that could still provide great returns for many years to come? Absolutely not!

Also on my shopping list

SMT isn’t the only investment trust I’ve been buying in May. I’ve also been adding to my already-sizeable stake in Smithson Investment Trust (LSE: SSON).

Like Scottish Mortgage, Smithson’s share price has been a bit volatile in recent months. Since its aim is only to invest in high-quality small and mid-cap firms, that’s not really surprising. Most of these rarely trade on cheap valuations. One can’t ignore the possibility that some early investors may be keen to bank profits. Since launch in October 2018 to the end of April 2021, Smithson achieved a quite brilliant annualised return of 25.4%. 

This is not to say that there’s aren’t a few things to bear in mind. While the ongoing charge of 0.9% certainly isn’t the highest in the market, it’s still high. Regardless of how manager Simon Barnard performs from here, that fee will always be due. One also needs to bear in mind that relatively youthful Barnard doesn’t have a long track record. 

This, however, is a risk I’m comfortable with. With its premium to net asset value dropping in recent weeks, I’m taking advantage while I can. 

The post Here’s why I’m still buying Scottish Mortgage Investment Trust appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Scottish Mortgage Investment Trust and Smithson Investment Trust. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Now, this fall wasn’t a complete surprise considering that frothy tech stocks make up much of its portfolio. Nevertheless, I duly jumped at the chance to top up my holding. But the Scottish Mortgage isn’t the only investment trust I’ve been buying more of in recent weeks. 

FTSE 250 stunner 

In sharp contrast to Scottish Mortgage Investment Trust’s 112-year history, Smithson Investment Trust (LSE: SSON) is still in its infancy. Part of the Fundsmith stable, SSON has only been around since October 2018. Even so, a quick look at its performance should explain why it has already gained a market cap of £2.4bn and inclusion in the FTSE 250. 

According to its latest factsheet, Smithson has achieved an annualised return of 21.3% since inception. However, quite a bit of this stunning return can be attributed to how the trust performed last year.

Over the course of 2020, the share price increased by 31.7%. For comparison, Smithson’s benchmark — the MSCI World Small and Mid Cap Index rose by 12.2%. Even more startling was that cash climbed just 0.3% in value — further evidence that holding anything in cash beyond a ‘rainy day’ fund will never make me rich. 

This result is yet another ‘win’ for Terry Smith. The strategy adopted by Smithson is identical to that of his much-larger Fundsmith Equity Fund, even though he’s not involved in the day-to-day running of the former. In other words, it buys quality companies at good prices and then does nothing. In practice, this means having exposure to UK firms such as Fevertree, Domino’s Pizza and Rightmove. US-listed consumer credit business Equifax and laser-specialist IPG Photonics also make the cut. 

But can this form continue?

In the near term, it’s impossible to say and that’s a risk for buyers of this trust. Just like individual company stocks, the performance of investment trusts can vary wildly from year to year. Indeed, manager Simon Barnard has already sought to quell expectations by suggesting that 2020’s performance will likely prove an anomaly.

This seems very sensible to me. After all, almost half of Smithson’s portfolio is made up of technology stocks and that means volatility. As anyone with an interest in the stock market will probably be aware, these aren’t the flavour of the month at the moment. Thanks to the gradual rollout of coronavirus vaccines, it’s beaten-down leisure and travel stocks that are now attracting more attention.

Then again, SSON’s share price has held up far better than that of Scottish Mortgage Investment Trust. At the close of play last Friday, the former was only 5% below where it stood at the start of the year.

Sure, a lot of this may be down to Smithson being geared towards investing in small and mid-cap companies. Unlike Scottish Mortgage, it has no interest in the likes of Tesla and Amazon. Nonetheless, I think this relative stability bodes well, especially for those investors who don’t want to spend too much time nursing their portfolio.

With a proven investment approach and a relatively young management team, I’m backing Smithson for the long term. 

The post Scottish Mortgage Investment Trust isn’t all I’ve been buying appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Scottish Mortgage Investment Trust, Fundsmith Equity and Smithson Investment Trust. The Motley Fool UK has recommended Dominos Pizza, Fevertree Drinks, and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Changing hands for near-4,000p a pop in 2018, the company’s share price tanked to just 900p during March’s market crash. Since then, it’s more than doubled.

Could the worst be over? Today’s half-year results suggest a tentative ‘yes’. There’s just one catch.

Fevertree exceeds expectations

Like other UK-listed companies in the drinks sector, Fevertree was always likely to be hit by the lockdown. While people could still enjoy a tipple at home, it was inevitable that the closure of pubs, bars, and restaurants across the country and beyond would hit sales. This also came at a difficult time for the £2.5bn cap as concerns grew over its ability to continue growing earnings at its previous rate.

Today, however, the company reported that off-trade sales had exceeded expectations and helped to mitigate the impact of Covid-19. This is not to say that all the headline numbers were necessarily pretty. 

Despite maintaining its position as the number one brand in the UK, revenue from its home market slumped 20% to £48.3m over the six months to the end of June. In Europe, revenue fell 29% to £20.5m.

Elsewhere, the figures were far more encouraging. In the US — a key growth market for the company — revenue rose 39% to £27.4m. This was way ahead of what was forecast and, when combined with a slight increase in its remaining markets, led Fevertree to report an 11% dip in sales overall (£104.2m). Not great but hardly disastrous.

Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) fell 35% to £23.8m. Margins also declined.

Positive outlook

All told, I think it likely that long-term holders of the stock will be fairly reassured by today’s results. The fact that Fevertree has continued to invest in marketing and its online platform during the pandemic (as well as recruiting new staff) doesn’t smack of a company in trouble. The post-period-end purchase of German distributor Global Drinks Partnership also bodes well, as does news on recent trading.

According to CEO Tim Warrilow, Fevertree has seen “an encouraging start to the second half of the year” and once free of the coronavirus, should be “in an even stronger position” than it was previously.

In the meantime, Fevertree’s finances continue to look rock-solid. The company had net cash of £136.9m at the end of the reporting period. This is up 32% from June 2019.

As positive as all this is, however, I’m still put off by the price investors are being asked to pay to acquire the stock. 

Fizzy valuation

A quality business usually commands a high price and Fevertree is no exception. At 59 times forecast earnings, however, the valuation is undeniably steep. High margins and returns on capital employed aside, that doesn’t translate to an appealing risk/reward trade-off from my perspective. After all, the coronavirus still hasn’t gone away. Indeed, things could still get worse before they get better.

Taking this into account, it’s perhaps no wonder that some traders decided to bank profits early this morning. If you’re tempted to buy the stock, just ensure you’re nicely diversified elsewhere.

The post Is top UK growth stock Fevertree now a buy? appeared first on The Twelfth Magpie.

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• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

That’s disappointing in itself but even more so when compared to the performance of the Smithson Investment Trust (LSE: SSON). In sharp contrast, the latter’s shares are now 12% up since the beginning of the year. 

What explains this outperformance? And more importantly, can it last? 

Remind me about Smithson 

Smithson was launched to great fanfare by Fundsmith CEO Terry Smith back in 2018. While all investment decisions are, for the time being, still run past the celebrated stock-picker, the day-to-day management of the trust is now in the hands of ex-Goldman Sachs man Simon Barnard.

Of course, top managers rarely come cheap. In sharp contrast to the 0.07% or so in fees charged by passive investing giants like iShares for running a FTSE 100 exchange-traded fund, Smithson charges 0.9%.

Since high fees can prove a huge drag on returns, investors therefore need to be confident that they’re getting value for money. So far, this hasn’t been an issue. Since its inception, the share price has climbed 44%. 

Why is it smashing the FTSE 100?

As you might expect, it’s all down to what’s in the portfolio.

Smithson invests in high-quality companies ranging between £500m and £15bn in value. UK-based holdings include tonic water maker Fevertree, property portal Rightmove and takeaway titan Domino’s Pizza. All have a history of generating fat margins and high returns on the money invested by management. These are just the sort of things investors are willing to pay a premium for right now. 

The trust is also concentrated, with just 31 stocks in the portfolio at the end of May. This makes it potentially more volatile than a FTSE 100 tracker. But assuming Barnard and co come up trumps with their picks, however, it’s potentially far more rewarding for investors. 

Naturally, the UK’s top tier contains some great companies. Unfortunately, there’s also quite a bit of low-growth, high-debt, cyclical stuff holding returns back too. 

So, is Smithson still a buy?

I think this really depends on how long you intend to stay invested. 

Smithson has had a great run relative to the FTSE 100, but the near-term outlook is far from certain. Another market crash can’t be ruled out, especially as the full economic impact of the coronavirus pandemic becomes clear. This is particularly relevant for the trust given that almost half of its cash is invested in the US market where valuations are beginning to look stretched once again.

Let’s not forget that, despite its performance in 2020 so far, Smithson wasn’t immune to March’s sell-off. From 19 February to 18 March, the shares tumbled almost 35% in value. 

As a long-term Foolish investor, however, none of the above bothers me all that much. Unless Smithson’s team starts deviating from its strategy of buying quality at reasonable prices and doing nothing else, I don’t intend to touch my holding for many years. This is the case even if the profits I’ve made so far are temporarily lost.

And while I wouldn’t necessarily pile in to the shares right now, I do think new, patient investors could still make great money in the long run.

The post Smithson Investment Trust has smashed the FTSE 100. Is there still time to buy? appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Smithson Investment Trust PLC and Rightmove. The Motley Fool UK has recommended Domino's Pizza and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This isn’t to say active funds aren’t worth bothering with. One good example, as far as I’m concerned, is the Smithson Investment Trust (LSE: SSON), managed by Simon Barnard.

Here are three reasons why I’m invested and plan on holding for many years.

Winning approach

One of the biggest draws of Smithson is the fact that Barnard adopts an identical approach to its highly popular (and highly successful) ‘big brother’ Fundsmith Equity Fund, run by Terry Smith. Buy great companies, try not to overpay, and then do nothing. 

By great companies, we’re talking about those capable of generating returns on capital employed far higher than the market average (something Warren Buffett suggests investors spend more time looking at). Among other things, they also need to have growth potential and low or no debt.   

While there are certainly some good companies within the FTSE 100, there are also some that generate poor returns on the money they invest, are weighed down by debt and/or offer very little in terms of growth. A drawback of the tracker, then, is you’re forced to buy these as well as the good stuff.

Concentrated portfolio

If I’m paying a manager far more in fees than I would for a tracker (0.9% for Smithson, compared to just 0.07% for the FTSE 100), I want to know they’re earning their money. You can’t outperform the index if the fund replicates the index.

That’s why one of the key things I look for before investing is the number of holdings it has. Here, I’m looking for a fairly low number since this would indicate the manager is only investing in their best ideas. Smithson had just 29 holdings at the end of January. 

A potential issue with having a limited number of stocks is that a few might experience problems, thus having a greater impact on returns compared to a FTSE 100 tracker, which will spread your cash around more companies. Then again, Fundsmith’s strategy of investing in quality defensive stocks has led it to beat its benchmark even during less stellar years. This bodes well for investors in Smithson, even though its portfolio of small- to medium-sized companies may be more volatile.

Great performance

Smithson was only launched in mid-October 2018. As such, it’s far too early to say whether the trust will perform as well as Fundsmith Equity. Moreover, both are still to be tested by a severe and sustained market downturn of the like we experienced from 2007 to 2009. 

Having said this, the performance so far has been encouraging. From inception to the end of last month, Smithson’s share price had climbed 29.4%. That compares very favourably to a 10.2% return achieved by its benchmark — the MSCI World SMID Index. Over the same period, the FTSE 100 was up a little over 3%.

Although the coronavirus outbreak will have put a brake on gains since, this return gives me confidence that Barnard knows what he’s doing. As such, I’m more than content to continue drip-feeding money into Smithson as the months pass. 

The post Why I’d buy Smithson Investment Trust over a FTSE 100 tracker appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has positions in Smithson Investment Trust and Fundsmith Equity fund. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

So far, Smithson has performed very well. According to the investment trust’s factsheet, from inception on 19 October to 28 February the net asset value (NAV) of the trust rose 6.3%, while its share price jumped 10.5%. In contrast, its benchmark, the MSCI World SMID index – which captures mid- and small-cap representation across 23 developed markets – fell 0.2% over that time period (and the FTSE 100 returned 0.3%). That’s a decent outperformance.

Can the investment trust keep delivering for investors? I think it can, despite the fact it currently trades at a small premium to the NAV. Here’s why I think Smithson is a great choice for growth investors.

Quality investing style

For starters, I’m a big fan of the ‘quality investing’ style that the Fundsmith team adopts. As I’ve noted before, Smith and his team have very strict criteria when it comes to choosing stocks. Specifically, they look for companies that have advantages that are difficult to replicate, have low debt, and are highly profitable. It’s quite similar to Warren Buffett’s approach to investing and, ultimately, it tends to produce excellent long-term returns for investors.

Global focus

I also like the fact that Smithson has a global remit, as this opens up a whole world of opportunities for the investment team. A look at the top holdings in the trust reveals some really interesting names. For example, one is Masimo Corporation – a US-listed medical technology company that manufactures a range of innovative non-invasive patient monitoring technologies and has enjoyed strong revenue growth in recent years. Another is Check Point Software Technologies, which is also listed in the US and is a big player in the cybersecurity space. Cybersecurity is a huge growth market right now. Closer to home, the trust also has a holding in property website group Rightmove.

These kinds of growth stocks could help the Fundsmith team generate impressive returns in the years ahead, in my view.

Mid- and small-caps

Finally, the trust’s focus on the mid- and small-cap sections of the market is another reason that I believe it could generate strong returns for investors, as research shows smaller companies tend to outperform their larger peers over time. For example, over the 10 years to 28 February, the MSCI World SMID Cap index generated a return of 15.3% per year which was around 1.6% higher per year than the return of the MSCI World index – which is more large-cap focused.

So overall, I see a great deal of potential in Smithson. With its focus on exciting growth companies that are perhaps a little more under the radar than mainstream growth stocks, I see the trust as a great choice for risk-tolerant growth investors.

The post Why Terry Smith’s Smithson Investment Trust could be a great choice for growth investors appeared first on The Twelfth Magpie.

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Edward Sheldon owns shares in Rightmove. The Motley Fool UK has recommended Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.