Shares in global small and mid cap investment trust Smithson (SSON) traded sideways at £18.86, despite a decidedly sub-par performance in the first half and a shortfall in dividend income.

For the six months to June, the total net asset value return per share was just 5.9% against a 12.4% return for the MSCI World Small and Mid-Cap Index.

In addition, dividend income was lower than operating costs, resulting in a revenue loss which was netted against capital gains. The firm admits that revenue losses ‘will often arise’ as 100% of management fees and costs are charged to revenue rather than capital reserves.


For the first time since launch, the trust underperformed its benchmark over six months as its portfolio of higher-rated growth stocks failed to keep pace with more lowly-rated stocks in the index thanks to growing expectations of rising inflation.

As fund manager Simon Barnard explains, higher inflation ‘in theory reduces the value of higher rated growth companies because the future earnings of these companies would have a lower perceived value today, once discounted back at the higher interest rates’.

Slower-growing companies have less of their earnings in the future to discount, so are less affected by this discounting phenomenon. Also, in times of rising inflation expectations investors are more willing to buy value stocks as ‘a rising tide lifts all boats’, says Barnard.

At an individual stock level, some of the trust’s previous winners such as US payroll software company Paycom and medical technology firm Masimo fell back due to lower demand for their products and services compared with last year.


The trust made three changes to the portfolio in the first half, buying two new holdings, US companies Rollins and Wingstop, and selling UK biotech firm Abcam (ABC:AIM).

Rollins competes with Rentokil Initial (RTO) in pest control, while Wingstop is a franchised chicken-wing restaurant and delivery business with a very high return on investment.

Barnard believes the business has ‘an enormous pipeline of new units waiting to be built, which should underpin strong double digit growth for years to come’.

The Wingstop investment, together with the trust’s holdings in Domino’s Pizza (DOM) and Domino’s Pizza Enterprises of Australia, increases the trust’s exposure to the consumer discretionary sector to 10.7%.

Adding the 4.8% weighting in mixer company Fevertree Drinks (FEVR:AIM), the third biggest holding in the portfolio, the trust has more than 15% of its investments in consumer businesses.


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Issue Date: 09 Aug 2021