This blog was originally written for the Motley Fool UK.

Back in October, Terry Smith and his team at Fundsmith launched Smithson, an investment trust with a focus on small- and mid-sized companies. There was a fair bit of fanfare at the time of launch with investors scrambling to invest in the trust, which isn’t surprising when you consider the amazing performance of Smith’s flagship Fundsmith Equity fund over the last five years.

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 of the top holdings 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.

Categories: Investment Writing


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