Performance Highlights
| At | At | |
| 31 December 2023 | 31 December 2022 | |
| Net assets | £2,551,938,000 | £2,417,967,000 |
| Net asset value (“NAV”) per ordinary share (“share”) | 1,598.0p | 1,410.7p |
| Share price | 1,415.0p | 1,308.0p |
| Share price discount to NAV1 | 11.5% | 7.3% |
| For the period from | |||
| Company’s listing on | |||
| For the year ended | For the year ended | 19 October 2018 to | |
| 31 December 2023 | 31 December 2022 | 31 December 2023 | |
| % change2 | % change2 | % change2 | |
| NAV total return per share1 | +13.3% | -28.1% | +59.8 |
| Share price total return1 | +8.2% | -35.2% | +41.5 |
| Comparator index total return3 | +9.1% | -8.7% | +47.2 |
| Ongoing charges ratio1 | 0.9% | 0.9% | 1.0% |
Source: Bloomberg
This report contains terminology that may be unfamiliar to some readers. The Glossary at the back of the Annual Report gives definitions for frequently used terms.
5 Year Record
| At 31 December | 2023 | 2022 | 2021 | 2020 | 2019 |
| Net assets | £2,551,938,000 | £2,417,967,000 | £3,367,070,000 | £2,331,950,000 | £1,437,305,000 |
| NAV per ordinary share | 1,598.0p | 1,410.7p | 1,961.0p | 1,648.9p | 1,255.2p |
| Share price | 1,415.0p | 1,308.0p | 2,020.0p | 1,710.0p | 1,298.0p |
| Share price (discount)/ | |||||
| premium to NAV1 | (11.5)% | (7.3)% | 3.0% | 3.7% | 3.4% |
| Year ended 31 December | |||||
| NAV total return | |||||
| per share1 | +13.3% | -28.1% | +18.9% | +31.4% | +33.2% |
| Share price total return1 | +8.2% | -35.2% | +18.1% | +31.7% | +29.8% |
| Comparator index total | |||||
| return3 | +9.1% | -8.7% | +17.8% | +12.2% | +21.9% |
| Ongoing charges ratio1 | 0.9% | 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 ended 31 December 2023.
This is our fifth Annual Report since the inception of the Company in October 2018, and as five years is probably the minimum period one could regard as being “long term”, it is appropriate to comment on the Company’s performance over this period.
The Company’s Net Asset Value (“NAV”) per share has increased by 59.8%, an annualised rate of 9.4%. This represents an outperformance compared with the Company’s reference index, the MSCI World SMID Index, which has returned 47.2% over the same period, an annualised rate of 7.7%. As the Investment Manager points out in his report, this is the best performance of any investment trust included within the AIC Global Smaller Companies sector.
Investors in the Company hold shares which are traded on the London Stock Exchange, and the price of the Company’s shares has, since early in 2022, lagged below the NAV per share. This discount widened during 2023 with the share price at the end of the year 11.5% lower than the NAV per share. This has adversely affected the return that shareholders have been able to realise, with the share price return over the period since inception amounting to 41.5%, an annualised return of 6.9%.
Performance in 2023
The Company’s NAV per share increased by 13.3% in the year, outperforming the MSCI World SMID Index by 4.2 percentage points.
This is a pleasing “return to form” after the underperformance in 2022 – which is the only calendar year in which the Company has underperformed the Index – and one which I hope provides shareholders with confidence in the future. No investment strategy can be expected to outperform in all market conditions, and although the underperformance in 2022 was significant, it was short lived, and reflected the combination of rising interest rates and the characteristics of the portfolio at that time. The Investment Manager’s report discusses the performance, the lessons learned in 2022 and the action taken since then.
As I noted above, the Company’s shares, which had traded at a premium to NAV for the vast majority of the period from launch in 2018 through to the end of 2021, started trading at a discount in early 2022 and have continued to do so throughout 2023. The discount, which at the beginning of the year was 7.3%, widened to 11.5% at the end of the year. This reduced the share price total return in 2023 to 8.2%, 0.9 percentage points lower than the Index return. The Board’s actions in response to the discount are summarised below.
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. The Company is a member of the FTSE 250 index, and with 159.7 million shares in issue, the Company’s market capitalisation at the end of 2023 was £2.26 billion.
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 regularly to meet demand and to manage the premium. When the Company’s shares started trading at a discount the Board, in consultation with its advisers and the Investment Manager, took action to mitigate the discount through the use of share buy backs.
During 2023 the Company bought back 11,715,000 shares at a cost, including stamp duty and dealing charges of £159.3 million, representing 6.8% of the shares outstanding at the start of the year. Since the buyback programme commenced in early 2022 the Company has bought back 19,065,000 shares representing 10.8% of the shares outstanding before the programme started. This is one of the largest buyback programmes in the investment trust sector. With the widening of the discount in the first half of 2023, the Company increased its rate of buybacks in the second half.
The buybacks in 2023 were at an average discount to NAV of 10.8% and, since the start of the programme, at an average discount to NAV of 10.2%. The buybacks are accretive for remaining shareholders, and in 2023 generated approximately £18.0 million of NAV accretion, equivalent to around 82.5% of the Company’s 2023 fees and expenses. As the Investment Manager’s fees are based on the Company’s market capitalisation rather than its net asset value, the discount also reduced the investment management fees during the year.
While the programme has not sustainably reduced the discount, we cannot of course say for certain what would have happened to the Company’s share rating if we had not bought back shares; and we have in any event secured NAV accretion, reduced share price volatility and provided reassurance to the Company’s shareholders and the wider market that the Board is cognisant of the need for a proactive buyback policy. Discounts are a common problem across the entire investment trust industry and the average discount in the AIC Global Smaller Companies sector widened to 13.6% at 31 December 2023.
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 they feel 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. The capital reduction was sanctioned by the High Court and completed in March.
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 accordingly be proposed at the forthcoming Annual General Meeting.
Continuation Vote
The average discount in 2023 was 10.7%, in excess of the 10% threshold requiring the Directors to consider whether to propose a continuation vote at the Annual General Meeting.
The Directors, together with the Company’s advisers, and the Investment Manager, have discussed this and concluded that it would not be appropriate to put a continuation vote to the AGM. In making this decision, the Board noted that the level of discount predominantly reflects broader market conditions and the fact that the Company’s discount, albeit higher than the Board would like, is lower than the average of its peers. This is therefore a market problem rather than being specific to the Company. This decision additionally reflects the Company’s strong NAV performance over both the short and long term (both in absolute terms and relative to the comparator index) as well as the Board’s confidence in the future prospects of the Company.
Results and Dividends
The Company’s total profit after tax for the year was £293 million, comprising a capital profit of £290 million and a revenue profit after tax of £3 million.
The revenue profit after tax arises because the Company’s dividend income in the year net of the withholding tax suffered was higher than its operating expenditure. All the Company’s operating expenditure (other than those expenses of a capital nature) 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 2023, and therefore a dividend is not proposed by the Board.
The Company has never paid a dividend, and 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.
The Company expects to hold between 25 and 40 investments; at the year-end it held 33. The composition of the portfolio at 31 December 2023 is shown below, and the Investment Manager’s Review explains the investment approach, and the performance and evolution of the portfolio in detail. Whilst the Investment Manager has made adjustments to the portfolio in the current year, the investment approach is unchanged.
Governance
The Board comprises four independent, non-executive directors. Following Denise Hadgill’s appointment in June 2022, the Board comprises two women and two men and accordingly meets the gender diversity targets recommended for FTSE 250 listed companies. The Company has a small Board which is appropriate for the nature of its activities and as the Company was only formed in 2018, its Board succession plan has not yet reached maturity. As such, there has not yet been an appropriate opportunity to appoint an ethnic minority Director to meet the FCA’s targets for FTSE 250 listed companies. The Board has resolved that it is not in shareholders’ best interests to increase the Board size simply to achieve this target. Nevertheless, the Board recognises the benefit of diversity and it hopes to be fully compliant with the FCA’s guidelines when it makes its next Board appointment.
All Directors will stand for re-election at the AGM and details on our background and experience are given in the Annual Report.
Sustainability and Environment, Social and Governance Considerations (“ESG”)
In recognition of investor interest in ESG matters the Board held a meeting to review the Investment Manager’s approach to responsible investment and how sustainability (including ESG factors) is incorporated into the investment process. The Investment Manager’s stewardship responsibilities were also discussed.
Whilst ESG matters are routinely reported by investment trusts, there are a few observations I would make about how Fundsmith approaches the area slightly differently. Firstly, the focus is on whether an investee company’s business model is sustainable and is capable of surviving economic cycles over the long term – which includes, but is much broader than, a review of ESG factors. Secondly the approach to stewardship is distinct. With a relatively small portfolio of investments to oversee, the Investment Manager is able to engage more regularly with all of the Company’s investee company boards. Furthermore, there is no outsourcing of voting to outside agencies or indeed to other Fundsmith departments; the investment management team does it all itself. The people looking after our money are therefore actively engaged in all aspects of stewarding our investments. I personally find that most reassuring.
Fundsmith’s Stewardship Report 2022 is available on the Company’s website, and Fundsmith’s application to remain a signatory to the FRC’s Stewardship Code was approved in August 2023.
A statement from the Investment Manager on its Responsible Investment policy and its application to the Company is included below.
Annual General Meeting (“AGM”) and Shareholder Engagement
The Company will hold its AGM on 25 April 2024. 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. A light lunch will be provided after the meeting.
We encourage shareholders to visit the Company’s website where more information is available on the Company.
Outlook
Our portfolio manager concludes his review by stating that the team ended the year with significant optimism for the future, reflecting their view that the portfolio positioning is the best they believe it has ever been, and that the interest rate cycle is almost certainly at its peak. The Board shares that optimism.
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 globally in the small and mid-cap sector, the long-term investor will be well rewarded.
Diana Dyer Bartlett
Chairman
26 February 2024