Fundsmith Smid trust gets first taste of underperformance

Smithson manager Simon Barnard says higher inflation unlikely to pose significant problems for portfolio companies


The Smithson Investment Trust has underperformed its benchmark for the first time since its inception as investors fretted over a sharp rise in inflation.

The £3.1bn trust, the youngest in Terry Smith’s Fundsmith stable, saw net asset value per share grow 5.9% over the first half of the year, while its share price increased 4.1%.  

This was considerably below its benchmark, the MSCI World Smid Index which gained 12.4% over the period.  

The stumble was a first for manager Simon Barnard (pictured) who has outpaced the reference index in every major reporting period since the trust’s launch in October 2018. Last year, returns were more than double the benchmark

Shares closed out Monday trading at 1876p, just modestly below the previous close. The trust’s shares traded at an average premium of 2.3% over the first half of the year.  

See also: Smithson more than doubles benchmark return on healthcare boost

Higher inflation unlikely to pose an issue for Smithson investments

Barnard blamed a combination of market jitters over higher inflation and the rally in value stocks for the trust’s unprecedented tumble.  

“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,” Barnard explained. 

“Interestingly, the underperformance pertaining to this increased inflation expectation by market participants seemed to reverse in June once the governor of the Federal Reserve made comments indicating that they were aware of the current increase in inflation, they believe it to be transitory, and so won’t be raising interest rate targets any time soon,” he added. 

Even if central banks’ predictions are wrong, Barnard said it is unlikely the prospect of higher inflation would pose a problem for his holdings. 

“The companies we own tend to have low input costs, and subsequently high gross margins, as well as low capital requirements, allowing them to generate high returns on capital. 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,” Barnard said.  

“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.” 

Cybersecurity firm and Domino’s Pizza drive performance

Despite the trust’s performance slump, Barnard said he was “very satisfied” with most of the earnings reported by his portfolio companies during the period.  

Its top performer over H1 2021 was US cybersecurity company Fortinet, a holding added last September. The company contributed 1.9% to performance, with its shares benefiting from a boost in cybersecurity spending by corporates following the well-publicised Solarwinds hack in December 2020. 

The next best performers were its holdings in both of the Domino’s Pizza master franchise operators, with the Australia branch contributing 1.3% and the UK company 0.9%, followed by AO Smith (0.9%) and Equifax (0.8%). 

Major detractors included Paycom Software, Versik Analytics and Qualys, another cybersecurity holding added in 2020, which each contributed –0.6%. 

Like other Fundsmith vehicles, Smithson picked up several new positions over the first six months of the year, with Barnard snapping up shares in fast food chicken chain Wingstop and pest control company Rollins. However turnover for the period was far lower at 2.3% compared to 20% last year.

See also: Smithson initiates holding in aviation-themed chicken wing chain

He sold a single holding, UK biotech business Abcam, on the basis its change in strategy would lead to “elevated risk” and higher spending. 

See also: Terry Smith and Fundsmith Emerging Equities Trust manager initiate fresh holdings


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