SMITHSON INVESTMENT TRUST PLC
LEI: 52990070BDK2OKX5TH79
RESULTS ANNOUNCEMENT
Audited results for the year ended 31 December 2022
Performance Highlights
| At | At | |
| 31 December 2022 | 31 December 2021 | |
| Net assets | £2,417,967,000 | £3,367,070,000 |
| Net asset value (“NAV”) per ordinary share (“share”) | 1,410.7p | 1,961.0p |
| Share price | 1,308.0p | 2,020.0p |
| Share price (discount)/premium to NAV1 | (7.3)% | 3.0% |
| For the period from | |||
| Company’s listing on | |||
| For the year ended | For the year ended | 19 October 2018 to | |
| 31 December 2022 | 31 December 2021 | 31 December 2022 | |
| % change2 | % change2 | % change2 | |
| NAV total return per share1 | -28.1% | +18.9% | 41.1% |
| Share price total return1 | -35.2% | +18.1% | 30.8% |
| Benchmark total return3 | -8.7% | +17.8% | 34.9% |
| Ongoing charges ratio1 | 0.9% | 1.0% | – |
Source: Bloomberg
This report contains terminology that may be unfamiliar to some readers. The Glossary in the Annual Report gives definitions for frequently used terms.
4 Year Record
| At 31 December | 2022 | 2021 | 2020 | 2019 |
| Net assets | £2,417,967,000 | £3,367,070,000 | £2,331,950,000 | £1,437,305,000 |
| NAV per ordinary share | 1,410.7p | 1,961.0p | 1,648.9p | 1,255.2p |
| Share price | 1,308.0p | 2,020.0p | 1,710.0p | 1,298.0p |
| Share price (discount)/ premium to NAV1 | (7.3)% | 3.0% | 3.7% | 3.4% |
| Year ended 31 December | ||||
| NAV total return per share1 | -28.1% | +18.9% | +31.4% | +33.2% |
| Share price total return1 | -35.2% | +18.1% | +31.7% | +29.8% |
| Benchmark total return3 | -8.7% | +17.8% | +12.2% | +21.9% |
| Ongoing charges ratio1 | 0.9% | 1.0% | 1.0% | 1.0% |
1 These are Alternative Performance Measures (“APMs”). Definitions of these, together with how these measures have been calculated, are disclosed in the Annual 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 the Annual Report of Smithson Investment Trust plc (the “Company”) for the year to 31 December 2022. This is our fourth Annual Report, and the first year in which the Company’s net asset value has fallen. Whilst this decline is disappointing, it comes against the backdrop of a steep decline in markets across the world. The Company’s net asset value per share has, however, fallen by more than the MSCI World SMID comparator index in 2022, the first year this has occurred, and the Company’s shares have traded at a discount to net asset value through most of the year.
There are two points which are worth emphasising, both of which are covered in greater detail in the Investment Manager’s Review. Firstly, our portfolio companies grew their businesses in 2022 despite the difficult market conditions and their financial key performance indicators were all materially better than those of the comparator index, demonstrating their characteristics as high quality companies. Unfortunately, the progress made by the portfolio companies was not sufficient to offset the impact on growth company valuations of the hike in interest rates. Secondly, only two segments of the comparator index actually registered positive returns in 2022 (Energy and Utilities); those two segments are therefore largely responsible for the index’ comparatively better performance. The Company does not invest in either of these segments as they do not meet the Investment Manager’s criteria for potential long term shareholder returns. Whilst it is disappointing to report on periods when asset values fall, the focus remains on long term value creation.
The Company’s performance and the Board’s actions in response to the discount are summarised below, and the Investment Manager’s Review discusses the portfolio’s performance in greater detail.
Performance
The decline in the Company’s net asset value (NAV) per share for the year was 28.1%1, underperforming the MSCI World SMID Index by 19.4 percentage points. At the interim stage, the fall in net asset value which the Company reported was 31.7%, so the outturn for the year is after recording a small improvement in the second half. Despite this significant underperformance, the Company’s annualised NAV per share total return since inception is +8.5%1, 1.1% higher than the annualised return from the index with dividends reinvested.
As noted in the Investment Manager’s Review, the decrease in portfolio company valuations during the year was such that at the year end, they were trading on free cash flow ratings comparable to those at the time of the Company’s launch in 2018. This means that the growth in the Company’s net asset value per share since IPO, which exceeds that of the comparator index, can largely be attributed to the underlying trading performance of the portfolio companies.
The Company’s shares, which traded at a premium to NAV for the vast majority of the period from launch in 2018 through to the end of 2021, have traded at a discount for almost all of 2022, and have continued to do so in the first part of 2023. The discount at the end of the year was 7.3%1, narrower than the 11.5% at the end of the first half of the year, but representing a very significant shift down from the 3.0% premium at the end of 2021. Combined with the negative total return on the NAV, to move from a modest premium to a discount has resulted in the share price total return for the year of negative 35.2%1. This has reduced the annualised share price return total return since inception to 6.6%1, 1.9 percentage points lower than the annualised increase in NAV per share.
The Company is a member of the FTSE 250 Index with a market capitalisation at the end of 2022 of £2.24 billion.
Capital
The Company was floated on the premium list of the London Stock Exchange (“LSE”) on 19 October 2018, breaking the record for the largest IPO of an investment trust in the history of the LSE with funds raised exceeding £822 million. For much of the period from inception through to March 2022 high demand resulted in the Company’s shares trading at a premium to net asset value. During this time, the Board oversaw the issue of new shares to meet demand and to manage the premium.
When the Company’s shares started trading at a discount in the first half of last year, the Board, in consultation with its advisers and the Investment Manager, sought to address the situation through the use of share buy backs.
During 2022 the Company issued 5.4 million new ordinary shares to raise £92.5 million net of costs and bought back 5.7 million ordinary shares at a cost, after dealing charges, of £74.0 million. The share allotments and buybacks each represented over 3% of the Company’s issued share capital at the start of the year. All share allotments and buybacks were accretive to the Company’s net asset value per share. The average premium to net asset value at which new shares were allotted was 2.6% and the average discount to net asset value at which shares were bought back was 8.7%. The buybacks accounted for over 10% of the Company’s shares being traded on the LSE in the period since the buybacks started.
The buyback programme is continuing and since the year end up until 22 February 2022 being the latest practicable date before the printing of this report, a further 1,050,000 shares have been bought back at a cost of £15.0 million after dealing costs, with an average discount to net asset value of7.5%.
As a matter of law, the Company is only permitted to fund purchases of its own shares out of its distributable reserves or the proceeds of a fresh issue of shares; and while the ordinary shares are trading at a price less than the latest published net asset value per share, the Company is not able to issue new shares.
As at 31 December 2022, the Company’s distributable reserves available to fund share buybacks were £196.7 million. The Board concluded that it was prudent to create further distributable reserves to ensure there is no technical impediment to prevent the Board from being able to continue to undertake share buybacks when it feels they are appropriate. The Board therefore called a General Meeting on 6 February 2023 at which shareholders passed a special resolution to reduce the Company’s share premium account and create £500 million additional distributable reserves. An application has been made to the High Court to sanction the capital reduction.
The Board intends to continue with its current programme of regular market purchases while the shares trade at a material discount. All shares purchased are held in treasury and will only be reissued at a premium to net asset value, net of all costs. Resolutions to replace the existing authorities granted by shareholders to the Board to allot new shares and buy back shares will be proposed at the forthcoming Annual General Meeting.
Results and Dividends
The Company’s total loss after tax for the year was £967.6 million, comprising a capital loss of £972.0 million and a revenue profit after tax of £4.4 million (see Statement of Comprehensive Income).
The revenue profit after tax arises because the Company’s dividend income in the year was higher than its operating expenditure. All the Company’s operating expenditure is charged to revenue, rather than a percentage being allocated to the capital reserve. This reflects the Company’s objective of focusing on capital growth which means that its accounting policy is not designed to facilitate maximisation of revenue reserves and dividend payments.
The Company’s cumulative revenue reserves were negative at 31 December 2022, and therefore a dividend is not proposed by the Board.
The Company has never paid a dividend. 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.
Investment Approach
In common with all funds managed by Fundsmith, the Company has a simple, focused strategy of investing in high-quality, listed company shares, seeking not to overpay for those shares and then holding them as long-term investments; the Company does not use derivatives and has no borrowings.
As a closed-end investment vehicle focusing on capital growth, the Company is free to focus its energies on pursuing its strategy without having the limiting factors of funding client redemptions, dividend payments (other than a minimum to maintain investment trust status) or gearing concerns. The Company has a strong balance sheet of highly liquid investments.
The Company expects to hold between 25 and 40 investments; at the year-end it held 31. The composition of the portfolio at 31 December 2022 is shown in the Investment Portfolio section, and the Investment Manager’s Review explains the investment approach, and the performance and evolution of the portfolio in detail.
Investment Policy
At the Company’s AGM in April the shareholders approved a revision to the investment policy, which clarified that the investment restriction as to market capitalisation range applies at the time of initial investment in a company and removed the expectation of the average market capitalisation of investee companies. This change, which came into effect on 3 May 2022, has had no effect, in any way, on how the Company’s investments are managed.
Governance
I took over as Chairman of the Board at the end of February 2022 and Lord St John of Bletso replaced me as Chairman of the Audit Committee. Jeremy Attard-Manche joined the Board on 1 March and is Chairman of the Management Engagement Committee. As part of our succession planning and to broaden the experience of the Board, Denise Hadgill was appointed as a Director of the Company with effect from 1 June 2022. We will all stand for election or re-election at the AGM, and details on our background and experience are given in the Annual Report.
ESG and Stewardship
During the year I have been asked quite a few questions by shareholders about the Company’s approach to ESG and the stewardship of its portfolio companies. This is explained in greater detail in the document on the Company’s website entitled ESG Integration, which has also been uploaded to the Association of Investment Companies website. The Board has delegated responsibility for all stewardship responsibilities to the Investment Manager and is updated at each Board meeting on any significant developments or interactions with investee companies. One of the benefits of holding a comparatively concentrated portfolio of shares is that the Investment Manager has more time to spend following developments at each portfolio company and has good and regular access to the top management in portfolio companies. The Investment Manager, furthermore, does not delegate voting to any outside agency, regarding this as an important shareholder responsibility which needs to be undertaken, thoughtfully, in-house.
Fundsmith is a signatory to the FRC’s ‘UK Stewardship Code 2020’. Fundsmith’s Stewardship Report 2021, together with the aforementioned ESG Integration document, are available on the Company’s website at www.smithson.co.uk. A few examples of the engagement with investee company management are given in the Investment Manager’s Review and a report on voting activity is included in the Strategic Report.
Annual General Meeting (“AGM”) and Shareholder Engagement
The Company will hold its AGM on 27 April 2023. My fellow directors and I are keen to meet with shareholders, and we encourage shareholders to come to the meeting. May I remind shareholders, whether or not they are able to attend the AGM in person, that you are welcome, at any time, to submit any questions you may have for the Board at smithsonchairman@fundsmith.co.uk. Please submit proxy votes in respect of the resolutions to be proposed at the AGM, irrespective of whether you intend to attend the AGM.
Simon Barnard, the Company’s portfolio manager, will give a presentation at the AGM which will be recorded and made available on the Company’s website after the meeting. Simon and members of his team will also be able to answer questions from shareholders at the AGM.
We encourage shareholders to visit the Company’s website where more information is available on the Company.
Outlook
The improvement in the Company’s net asset value which commenced in the second half of 2022 has continued, to date, in 2023. However, uncertainty around future interest rate rises, high levels of inflation and fears of a recession are likely to continue in the coming year. Whether the opening of the Chinese market post the lifting of COVID‑19 restrictions will have a positive impact by generating economic growth or unleash further inflation or both is also uncertain. Political uncertainty has increased and there seems no end in sight to the Ukraine conflict. These are not easy conditions for a portfolio manager to navigate.
The Investment Manager’s Review provides an overview of how our portfolio companies might be expected to respond to the continuing economic uncertainties and why we believe they are high quality companies with robust business models which will continue to demonstrate resilience during periods of challenging market conditions.
The Board is pleased that our portfolio manager and his team remain focused on the things they can control and remain resolute in maintaining their investment approach. The strategy of identifying and owning high quality companies that are capable of sustainable growth and that can compound in value over many years, has been shown to work well over the long term through different economic conditions.
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 in the small and mid-cap sector, the long term investor will be well rewarded.
Diana Dyer Bartlett
Chairman
27 February 2023
1 These are APMs Definitions of these and other APMs used in the Annual Report, together with how these measures have been calculated, are disclosed in the Annual Report.