Where to now for Smithson?

schiff

Smithson is up 47% on its launch price 18 months ago. It is invested in various countries and various industries, so it is a general rather than a niche market fund (where sharp rises can happen if the niche becomes fashionable). For that type of fund is such a rise a bit exceptional? What is driving it forward to this degree? Is it better placed to maintain its current level than other comparable funds?

Linton

Smithson is pretty close to being a niche fund - it focuses on high quality medium sized companies and is 40% technology and communications.  Its performance is similar to tech funds.

Prism

Smithson had a lucky start after a correction in global equities and around 10% of the gains can be reasonably attributed to that. However the rest of the outperformance seems to be good stock picking - as it follows the Fundsmith model closely that is to be expected. Impressive considering the Vanguard Global small cap index fund is on 0% since Smithson's launch. I hope this continues onwards and upwards.

dunstonh

I would class it a satellite fund.  i.e. niche/focused.  Not ideal for your core holding but an ideal fund for a satellite holding should you have a sufficiently high enough risk profile.  (that is not to say I would use it.  I am just indicating where it would be used if I was to use it)

<div>For that type of fund is such a rise a bit exceptional? </div>

No its not considering its risk level and the period in question.  It's launch date was during the Q4 2018 decline. So, it was able to avoid some of that and then take advantage of the recovery in 2019 without having most of the negative period of 2018 in its charting.

Being smaller companies focused, it will be more volatile and would be expected to make more on the upside but suffer more on the downside. 

bowlhead99

dunstonh said:

Being smaller companies focused, it will be more volatile and would be expected to make more on the upside but suffer more on the downside.  

Yes, as examples of recent crash for few weeks following 19 Feb:
VWRL (vanguard ftse all world) £74.07 to £ 55.56 (-25%)
IWFS (ishares MSCI world midcap equal weight) £29.71 to £19.80 (-34%)
SSON (smithson) £13.88 - £9.10 (-35%)

SSON came back very strongly after and is now higher than it was before the drop, but that can happen with high conviction concentrated portfolios in small-medium companies if they call it right.  If they had called it wrong of course, we probably wouldn't be having this thread because people would shrug and say they knew it could happen because you expect volatility with sort of fund vehicle, and just be glad it wasn't a bigger part of the portfolio etc. As it turned out well, they are wishing it was a bigger part...  

cloud_dog

I switched from EWI to SSON shortly after launch so as to reduce the (relative) volatility.  Obviously, EWI's remit is for smaller companies (up to $1b I believe), as opposed to up to $15b for SSON.

aroominyork

bowlhead99 said:

dunstonh said:

Being smaller companies focused, it will be more volatile and would be expected to make more on the upside but suffer more on the downside.  

Yes, as examples of recent crash for few weeks following 19 Feb:
VWRL (vanguard ftse all world) £74.07 to £ 55.56 (-25%)
IWFS (ishares MSCI world midcap equal weight) £29.71 to £19.80 (-34%)
SSON (smithson) £13.88 - £9.10 (-35%)

SSON came back very strongly after and is now higher than it was before the drop, but that can happen with high conviction concentrated portfolios in small-medium companies if they call it right.  If they had called it wrong of course, we probably wouldn't be having this thread because people would shrug and say they knew it could happen because you expect volatility with sort of fund vehicle, and just be glad it wasn't a bigger part of the portfolio etc. As it turned out well, they are wishing it was a bigger part...  

But Smithson’s low of 910p was during those strange few days when most ITs went to a deep discount, in Smithson’s case to -18%. A week or two either side and it was hovering within a few per cent of par to NAV so if you strip out that anomaly it fell between 15% and 20%, and not by 35%.

bowlhead99

aroominyork said:

 Smithson’s low of 910p was during those strange few days when most ITs went to a deep discount, in Smithson’s case to -18%. A week or two either side and it was hovering within a few per cent of par to NAV so if you strip out that anomaly it fell between 15% and 20%, and not by 35%.

Sure, but small-mid cap investment trusts can give that sort of volatility (moreso than largecap diversified investment trusts which do not go to deep discounts, or largecap open ended funds which may swing the valuations to accommodate joiners and leavers especially in rocky conditions but do not officially trade at meaningful discounts or premiums) ; so it is still true to say as dunstonh did, that: Being smaller companies focused, it will be more volatile and would be expected to make more on the upside but suffer more on the downside.  That would be generally true in an open ended fund, but even moreso in a closed ended one where the potential for discounts and premia 'can and will' add to volatility. 

aroominyork

bowlhead99 said:

aroominyork said:

 Smithson’s low of 910p was during those strange few days when most ITs went to a deep discount, in Smithson’s case to -18%. A week or two either side and it was hovering within a few per cent of par to NAV so if you strip out that anomaly it fell between 15% and 20%, and not by 35%.

Sure, but small-mid cap investment trusts can give that sort of volatility (moreso than largecap diversified investment trusts which do not go to deep discounts...

But if we are comparing like with like we should look at small cap ITs v. large cap ITs, not at diversified ITs. Many large cap ITs took a short dive into deep discount territory at the same time as SSON. Below charts the premium/discount for the last six months (and I do not think JEO and SMT are atypical) so I still think it's appropriate to look at NAV and conclude that Smithson held up well.

Smithson (SSON)

European Opportunities Trust (JEO)

Scottish Mortgage Trust (SMT)

bowlhead99

aroominyork said:

bowlhead99 said:

aroominyork said:

 Smithson’s low of 910p was during those strange few days when most ITs went to a deep discount, in Smithson’s case to -18%. A week or two either side and it was hovering within a few per cent of par to NAV so if you strip out that anomaly it fell between 15% and 20%, and not by 35%.

Sure, but small-mid cap investment trusts can give that sort of volatility (moreso than largecap diversified investment trusts which do not go to deep discounts...

But if we are comparing like with like we should look at small cap ITs v. large cap ITs, not at diversified ITs. Many large cap ITs took a short dive into deep discount territory at the same time as SSON. Below charts the premium/discount for the last six months (and I do not think JEO and SMT are atypical) so I still think it's appropriate to look at NAV and conclude that Smithson held up well.

I'm not saying it didn't hold up well in this particular set of circumstances. But generalising, small-midcap shares have more volatile NAVs, investment trusts with focused holdings are more volatile, and investment trusts with small-midcap focused holdings have volatile NAVs and can move to larger discounts than more conservatively run trusts (whether conservative means more largecap or more diversification).

So it wasn't surprising that when SSON's share price was falling the discount went to 14% one day, 17% the next day, 16% the next day before normalising.  Whereas a more largecap, diversified trust like Bankers had its discount go to 10%, then 12%, recovery to 3.5%, and one more day of 10% before normalising. They both lost a similar percentage of their share price (about a third over the month from mid Feb to mid March); SSON's larger discount (as the market lost its appetite for small-midcap companies held in a tightly focused portfolio) meant that the net result for the investor over the month was just as bad despite its underlying NAV holding up better.

To compare its discount performance with a largecap fund such as SMT and concluding that is just the same, so focused smallcaps are no more volatile than focused largecaps, is perhaps not a great example.

SMT is well known for its volatility, with a track record of dropping 55% over 30 months from September 2000 and of dropping 62% in six months in 2008. It is the kind of fund investors buy hoping for great long term growth but knowing it can fall to pieces overnight (or over a 6 month period like it did in the global financial crisis, or over a 2-3 year period following the dotcom boom). So you would expect that when the world suddenly goes on unprecedented lockdown, investors run for the exits.

A fifth to a quarter of SMT's holdings are in private companies that face just the same business issues as public companies but don't have their price reassessed daily. So when SMT goes to a 16% discount  on its reported NAV, but the reported NAV hasn't been updated for a reassessment of its private holdings using a public markets comparative, investors know they are not really getting as much as a 16% discount on the 'real' NAV. This is because they presume that a genuine reassessment of what the private holdings are worth as of mid-March with the world closed down is not going to be as high as they were worth when they were last valued in December, because any buyer's assessment would consider market conditions and not want to pay as much. And so when SMT reports its NAV at £x, its fair NAV is not as high as £x, so when the SMT investors pay £y for a share (or receive £y for selling a share) they are not really getting (or giving) as much as a 1-y/x discount. 

As such, if SMT - which is a trust very well known for its volatility and for dropping over 50% in the bad times at least twice in recent memory - is only dropping to an effective discount of something less than 15%, while SSON is dropping to 16 or 17% a few days in a row, the point is pretty proven that smallcap focused trusts are particularly volatile and can end up with relatively high discounts causing their realisable value to be less stable than more boring largecap funds or trusts.

After all, if SSON's whole philosophy is to buy high quality businesses with strong future prospects, and not mess with its portfolio too much (which sounds like a nice idea), it is a bit of a shame for its investors that you can't get your money out without conceding a sixth of your value as a discount for the person willing to take over your shareholding. The pricing is of course just a reflection of the trust’s large and diverse shareholder base reacting to fractious market conditions.

Volatility is the friend of the long term buy-and-hold investor, especially in investment trusts. It affords opportunity: both for the trust manager to buy investments on the cheap, and for the investor to buy into the investment trust for less than the sum of its parts. There are a number of trusts that went to deep discounts (some private equity ones at 50%) so the recent market turmoil won't have been bad for everyone. I sold some holdings in Harbourvest in the £16-17 range as its price was relatively slow to fall compared to some markets - bought back in the £9-10 range, and its back up to around £14 now. Unlike SSON, it's given up two years of share price growth but investors may still be up if they've paid attention

aroominyork

bowlhead99 said:I'm not saying it didn't hold up well in this particular set of circumstances.

At the risk of being a dog with a bone (TM cloud_dog) I think you did. To demonstrate that Smithson would, as dunston said, "be expected to make more on the upside but suffer more on the downside", you wrote:

"...as examples of recent crash for few weeks following 19 Feb:
VWRL (vanguard ftse all world) £74.07 to £ 55.56 (-25%)
IWFS (ishares MSCI world midcap equal weight) £29.71 to £19.80 (-34%)
SSON (smithson) £13.88 - £9.10 (-35%)"

and I pointed out that if you strip out the the discount which affected a wide range of ITs over that week, Smithson held up very well compared to VWRL.