INTERIM RESULTS ANNOUNCEMENT
Results for the six months ended 30 June 2024
The full Interim Report for the six months ended 30 June 2024 (the “Interim Report”) can be found on the Company’s website at www.smithson.co.uk
Performance Highlights
Net Asset Value
| At | At | At | |
| 30 June 2024 | 30 June 2023 | 31 December 2023 | |
| Net assets | £2,274,421,000 | £2,622,930,000 | £2,551,938,000 |
| Net asset value (“NAV”) per | |||
| ordinary share (“share”) | 1,569.5p | 1,575.4p | 1,598.0p |
| Share price | 1,378.0p | 1,400.0p | 1,415.0p |
| Share price discount to NAV1 | 12.2% | 11.1% | 11.5% |
| For the period from | |||
| Company’s listing on | |||
| Six months ended | Six months ended | 19 October 2018 to | |
| 30 June 2024 | 30 June 2023 | 30 June 2024 | |
| % Change2 | % Change2 | % Change2 | |
| NAV total return per share1 | -1.8% | +11.7% | +56.9% |
| Share price total return1 | -2.6% | +7.0% | +37.8% |
| Comparator index total return3 | +3.4% | +1.9% | +52.2% |
| Ongoing charges ratio1 | 0.9% | 0.9% | 1.0% |
Source: Bloomberg.
1 These are Alternative Performance Measures (“APMs”). Definitions of these, together with how these measures have been calculated, are disclosed on pages 24 and 25 of the Interim Report where it is made clear how these APMs relate to figures disclosed and calculated under IFRS.
2 Total returns are stated in GBP sterling.
3 MSCI World SMID Cap Index, £Net Source: www.msci.com.
Chairman’s Statement
Introduction
I am pleased to present this Interim Report of Smithson Investment Trust plc (the “Company”) for the six months ended 30 June 2024 (“Interim Report”).
Performance
The Company’s net asset value (“NAV”) per share total return for the period was negative 1.8% compared with the 3.4% positive return from the MSCI World SMID Index. This is, as the Investment Manager reports in his half year review, frustrating. The last two and a half years, and particularly the last 18 months, have been challenging for those investing in small and mid-cap stocks.
The performance of the MSCI World Index, which is driven by the performance of a small number of very large technology stocks, has been very strong, and the divergence in performance between the MSCI World Index and the MSCI World SMID Index over the last 18 months is significant. The MSCI SMID Index has returned 12.8% over that period, whilst the MSCI World Index has returned 31.6%. These market conditions, and the performance of the Company’s portfolio, are discussed in more detail in the Investment Manager’s review.
There is no doubt that good returns can be delivered by investing in small and mid-cap stocks. The Company’s objective is to provide shareholders with long term growth; the Company’s annualised NAV per share performance in the nearly six years since inception to the end of June 2024 was +8.2% pa, 0.5 percentage points higher than the return from the MSCI World SMID Index.
Despite the efforts of the Board to try to reduce the discount to NAV at which the Company’s shares trade though its buyback programme, the share price performance continues to be disappointing, with the share price loss for the first half amounting to 2.6% and the annualised return since inception lagging NAV performance at +5.8%. The buyback programme is detailed further below.
Discount and Share Buybacks
Since the end of the first quarter of 2022 the Company’s shares have traded at a discount to net asset value. The problem of discounts is common across the investment trust sector, and to put the scale of the problem into context, at the end of June 2024, according to the Association of Investment Companies’ statistics, some 94% of investment trusts were trading at a discount and the average discount across the industry at 30 June 2024, excluding 3i, was 15%.
The Board has reacted to the Company’s discount by adopting the common practice of buying back shares and commenced a programme of regular market purchases in April 2022. In the first half of 2024 the Board spent £206.4m on buybacks, representing 8.3% of the issued share capital before the buyback programme began. This brings the total spent on share buybacks from the start of the programme in 2022 until the end of the first half of 2024 to £439.7m, equivalent to 18.2% of the issued share capital at the start of the buyback programme. Nevertheless, the discount at the end of June 2024 was 12.2%.
As I mentioned above, discounts are a common problem across the investment trust industry and despite the Company, in the first half of 2024, ranking second overall in the investment trust market in terms of amount bought in and third in terms of percentage of share capital in issue at the start of the year bought back, the discount still widened.
Whilst the buyback programme has clearly not addressed the Company’s discount, (although the discount may have been greater if we had not bought back so many shares), it has nevertheless brought some benefits to shareholders, taken as a whole. The accretive value of the buybacks in the first half amounted to an estimated £25.7m, equivalent to 152% of the Company’s operating expenses; since inception of the programme to the end of the first half of 2024, £50.2m of estimated accretive benefit to shareholders has been generated. It should also not be forgotten that as the Investment Manager’s fees are based on market capitalisation rather than NAV, we estimate the discount has been responsible for their fees being reduced by some £1.1m in the first half of the year and by £2.2m during 2023.
When I met shareholders earlier this year, it was clear that they favoured the higher level of buybacks and the Board intends to continue allocating a substantial amount of the Company’s capital to the buyback programme if discounts continue to prevail at high levels.
Results and Dividends
The Company’s total loss after tax for the half year was £71m comprising a capital loss of £77m and a revenue profit of £6m. The income the Company receives from its investments tends to be higher in the first half of the year than in the second half, whereas its expenses are more evenly split between the half years, and, as in previous years, it is expected that the full year revenue profit will be lower than in the first half and may even be negative.
In the first half, the Company’s operating cost ratio (“OCR”) was 0.86% compared with the OCR for 2023 of 0.88%. The main reason for the improvement is the impact of the Company’s discount on the Investment Manager’s fee. We would expect this to reverse once the Company’s discount narrows and the share price more closely tracks the NAV.
The Company’s objective is to focus on capital growth and its expenses allocation policies are not designed to facilitate maximisation of revenue reserves and dividend payments. Consistent with previous interim periods a dividend is not proposed by the Board.
There is no current intention to change the Company’s approach. It should not be expected that the Company will pay a significant annual dividend and it is likely that no interim dividends will be declared. The Board intends to declare such annual dividends as are necessary to maintain the Company’s UK investment trust status.
AGM and Shareholder Engagement
The Company held its Annual General Meeting on 25 April 2024. It was good to see so many shareholders attend in person and to hear directly from Simon Barnard, our portfolio manager, and his team. Simon’s presentation is available on the Company’s website.
Following investor feedback to the Board’s original decision not to hold a continuation vote at the AGM, the decision was reversed, and an ordinary resolution in favour of continuation of the Company was included in the Notice. The resolution was passed with 90% of the votes cast in favour. The Board has also resolved that where similar circumstances arise in future, the Board will automatically put such a vote to shareholders at the following AGM. This means that if the average discount in the first half, prevails in the second half, we will put another continuation vote to shareholders at the 2025 AGM.
Outlook
Our Investment Manager has continued to refresh the portfolio, adding new names and exiting some long-held names, and they continue to believe that the portfolio is well positioned to achieve the objective to deliver long term growth in value. The Board shares the Investment Manager’s optimism and is pleased that Simon and his team remain focused on the things they can control and remain resolute in maintaining their investment approach.
Although the first half performance has been disappointing, shareholders should not lose sight of the fact that the Company has nevertheless outperformed its comparator index since inception. As our Investment Manager says, the headwind of rising interest rates will not last forever. The Board continues to have confidence that the Company’s Investment Manager can execute the strategy successfully, and the Board believes that as the Company offers investors exposure to some of the best companies available globally in the small and mid-cap sector, the long-term investor will be well rewarded.
Diana Dyer Bartlett
Chairman
26 July 2024