While its performance in 2022 has been poor, mid cap investor Smithson Investment Trust (SSON) reported a respectable return for 2021.

It achieved a net asset value total return per share of 18.9%, slightly ahead of the 17.8% return for the MSCI World Small and Mid-cap index.

In common with other funds run by asset manager Fundsmith, Smithson only buys quality companies, trying not to overpay for them and holding them for the long term.

As manager Simon Barnard admits, this strategy inevitably means the trust owns various high growth companies which trade on more expensive multiples than the market average.

Considering the US 10 Treasury yield jumped by two thirds from 0.91% to 1.51% in 2021, Smithson should theoretically have underperformed the market last year as investors rotated into value stocks. Instead, the trust beat the market thanks to superior stock selection as several of its big holdings delivered positive news. Moreover, its highest-rated holding was one of its best performers, gaining 30% last year.

As Barnard says, while in theory value should have worked better than growth, ‘sometimes financial theory proves to be just that, a theory, which doesn’t actually play out perfectly in the financial markets, driven as they are by millions of fallible, emotional people’.

The top five contributors to the trust’s performance in 2021 were cyber security firm Fortinet, software provider Nemetschek, credit rating and data manager Equifax, fast-food chain Domino’s Pizza (DOM) and heater and boiler maker AO Smith.

The top five detractors were travel software firm Sabre, medical device maker Ambu, industrial laser designer IPG Photonics, financial software supplier Simcorp and payments provider Paycom.

Despite a 22.8% fall in the trust’s total return NAV so far this year, against an 8.4% fall for the benchmark, Barnard isn’t disheartened.

Owning high quality companies with sustainable growth ‘is a winning strategy over the long term, has been shown to work through several economic cycles, and is one which we know we can execute successfully,’ he argues.

A value strategy is ‘inherently more difficult, as you cannot hold value companies for the long term if all you are doing is owning a poor-quality company at a low price, which you hope will re-rate in the future’.

For the value manager, the longer their holdings take to re-rate the lower their annualised returns, whereas growth companies are by their nature continually creating value, meaning time is on
their side.

Disclaimer: The author of this story (Ian Conway) and the editor (Daniel Coatsworth) own shares in Smithson Investment Trust

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