Financial Highlights
|
|
At |
At |
|
|
31 December 2020 |
31 December 2019 |
|
Net assets |
£2,331,950,000 |
£1,437,305,000 |
|
Net asset value (“NAV”) per ordinary share (“share”) |
1,648.9p |
1,255.2p |
|
Share price |
1,710.0p |
1,298.0p |
|
Share price premium to NAV1 |
3.7% |
3.4% |
|
|
|
|
For the period from |
|
|
|
|
Company's listing on |
|
|
For the year ended |
For the year ended |
19 October 2018 to |
|
|
31 December 2020 |
31 December 2019 |
31 December 2020 |
|
|
|
% change2 |
% change2 |
|
NAV total return per share1 |
+31.4% |
+33.2% |
+64.9% |
|
Share price total return1 |
+31.7% |
+29.8% |
+71.0% |
|
Benchmark total return |
+12.2% |
+21.9% |
+25.4% |
|
Ongoing charges ratio1 |
1.0% |
1.0% |
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.
1 These are Alternative Performance Measures (“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.
2 Total returns are stated in GBP sterling.
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 2020. This is our second Annual Report, and I am delighted to note the Company's continued growth and very strong performance in 2020 both in absolute terms and relative to its reference index, particularly in light of the challenges presented to global markets by the COVID-19 pandemic, Brexit and the US elections.
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. Since that time the Company has raised a further £925 million net of costs in the secondary market, making the Company the most successful investment trust in terms of secondary share issuance in each of 2019 and 2020. It now has a market capitalisation of approximately £2.4 billion and is a member of the FTSE 250 index.
In common with all funds managed by Fundsmith, the Company has a simple and 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 which have performed well both in 2020 and since the IPO, despite all the challenges encountered in 2020, as can be seen below and in the Investment Manager's Review.
Performance
In the year to 31 December 2020, the net asset value (“NAV”) per share total return was 31.4%, more than double our reference index, the MSCI World SMID Index, which returned 12.2%. The share price rose from £12.98 at the start of the year to £17.10 at 31 December 2020, representing a total return for the year of 31.7%. Since the IPO in October 2018, the Company has recorded a NAV per share total return of 64.9% compared with the MSCI World SMID Index return of 25.4% over the same period.
The Company holds 31 investments. During the year, 3 new investments were made with 1 outright divestment, although there were some changes in the weightings of the investment holdings which resulted in some partial divestments. This accords with the Company's stated investment approach of being a long term-investor in its chosen shares. One of the acquisitions, Fortinet, and the outright divestment of Check Point were made in the second half of the year. Simon Barnard, the portfolio manager, has reported on the performance in detail in the Investment Manager's Review.
In our Interim Report, we noted that the Company's dividend income was lower than its operating expenditure resulting in a revenue loss, which was netted against the capital gains reported in the total returns. This has continued in the second half such that there is a deficit on the revenue reserve for the year. The revenue loss arose because 100% of the Company's management fees and other indirect operating expenses are charged to revenue, rather than a percentage being allocated to the capital reserve. This accords with 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. There is no current intention to change this policy, even if losses continue to be reported in revenue reserves.
Share issuance and premium to NAV
With the exception of a few days when financial markets were in turmoil from the initial impact of the COVID-19 pandemic, the Company has continued to trade at a premium to NAV and closed the year at a 3.7% premium with an average premium over the year of 1.9%. The Board monitors the level of premium to NAV at which the Company's shares trade and has a regular share issuance programme to manage the premium.
During the year, and in response to continuing strong demand for the Company's shares (as evidenced by the share price premium to NAV), the Company raised £398 million net of costs through the issue of 26.9 million new ordinary shares, more than any other investment trust issued in the secondary market over the same period. Shares are only issued at a premium to net asset value which creates additional value for shareholders net of all issue costs. The average premium to the prevailing net asset value at which new shares were issued during the year was 2.9% and the net premium on share issues amounted to approximately £5.4 million.
As explained in greater detail in the Investment Manager's Review, the new share proceeds have been predominantly invested in the same securities as were held at the start of the year.
Since the year end and up to 12 March 2021, a further 9,132,000 ordinary shares have been issued, raising £150.6 million net of costs. This brings the total net funds raised since the Company's IPO in October 2018 to £925 million. Shareholders should note that value created from the secondary share issuance programme since IPO to 12 March 2021 is estimated at £16.5 million. Shareholders will recall that the £822 million raised at the time of the Company's IPO was a record for a UK investment trust. The trust's continuing popularity and success in raising new funds are a testament to the excellent performance of our Investment Manager.
In view of the continuing strong demand for the Company's shares, shareholders will be asked, at the forthcoming Annual General Meeting, to grant the Company authorities to issue up to a further 20% of the issued share capital as at the latest practicable date before publication of the Annual Report. This will enable the Directors to continue to create further shareholder value and help manage the level of any share price premium. Any such issues will be on a non pre-emptive basis.
Results and dividends
The Company's total return after tax for the year was £496.5 million (2019: £238.1 million), equivalent to 396.99p per share (2019: 242.49p) comprising a capital return of £499.4 million (2019: £237.9 million), equivalent to 399.28p per share (2019: 242.23p) and revenue loss of £2.9 million (2019: return of £0.26 million) equivalent to a loss of 2.29p per share (2019: gain of 0.26p). As reported previously, the Company's principal objective is to provide shareholder returns through long-term capital appreciation rather than income. In accordance with the Company's policy, a dividend is not proposed by the Board.
This position will be kept under review. 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, but the Board intends to declare such annual dividends as are necessary to maintain the Company's UK investment trust status.
Operations
As we reported at the interim stage, as part of the Board's response to the potential operational risks presented by the COVID-19 pandemic, our key outsourced service providers were asked to provide reports on their actions and responses, all of which were entirely satisfactory. The situation since the first lockdown has continued to be monitored and I am pleased to report that there has been no noticeable change in any of the services provided to the Company during the year or since the year end, a testament to our suppliers' operational resilience.
Environmental, social and governance (“ESG”) matters
In response to the increased interest in reporting on ESG matters, the Investment Manager's Review includes an overview of how the Investment Manager considers ESG and other sustainability issues when implementing its investment strategy. It also provides an overview of how the Company has discharged its governance duties in respect of investee companies. Commentary on the Company's engagement with investee companies as well as its voting at investee company shareholder meetings is set out in the Investment Manager's Review and on page 27.
Furthermore, the Association of Investment Companies (“AIC”) is proposing to introduce a database of investment company policies with regard to ESG matters and the Company intends to submit its policy in this regard to the database when this facility is introduced, currently scheduled for the second quarter of 2021. A copy of the Company's policy will also be available on the Company's website at www.smithson.co.uk.
Board performance evaluation
As the Company approached its second anniversary, the Board decided that it was an appropriate time to commission an independent evaluation of the Board's performance, effectiveness, processes and governance compared to best practice as well as a review of the Directors' remuneration. Periodic use of external advisers to undertake these exercises is one of the recommendations of the Financial Reporting Council. Details of the evaluations, how they were conducted, and their conclusions are given in the Annual Report.
Annual General Meeting (“AGM”)
As shareholders will recall, the first lockdown came into force after we had convened the 2020 AGM but before the meeting had taken place and as a result we wrote to shareholders asking them not to attend the meeting. The Board had hoped that an additional ad-hoc meeting with shareholders could be held later in the year but this was again not possible due to the ongoing COVID-19 restrictions on gatherings and movement of people. At the date of this report, there continues to be uncertainty as to what social distancing rules might apply at the date of the Company's AGM on 28 April 2021 and as such the Board has taken the decision to restrict shareholder attendance at the meeting. The Notice of Meeting accompanies the Annual Report and shareholders are asked to appoint the Chairman of the meeting as their proxy to ensure their votes are counted. Shareholders will further note that one of the resolutions to be put to the AGM is to amend the Company's articles of association to enable hybrid meetings using virtual technology to be employed for future meetings as the Directors may deem appropriate.
Although we are restricting attendance at the AGM this year, a presentation by Simon Barnard, our Investment Manager, on the performance of the Company's investments will be available on the Company's website at www.smithson.co.uk.
Shareholder engagement
My fellow Directors and I remain keen to meet with shareholders once it becomes safe and practical to do so. In the meantime, I would like to remind shareholders that they are welcome, at any time, to submit any questions they may have either to the Board at smithsonchairman@fundsmith.co.uk or to the Investment Manager at smithson@fundsmith.co.uk. In addition, we would encourage shareholders to visit our website at www.smithson.co.uk where more information is available and which is regularly updated.
Outlook
Despite the ongoing impact of the COVID-19 pandemic on the global economy and continuing efforts to contain it, the Board is very pleased with the Company's performance to date and remains positive on the outlook for global small and mid-cap equities in the medium to long term.
The Board intends to continue to issue new shares so as to generate additional value for shareholders net of all issue costs and to enable the Investment Manager to continue to seek attractive investment opportunities for any further capital raised. The increase in scale of the Company since the IPO has allowed the Board to negotiate some lower percentage charges for services provided and these cost reductions will benefit the Company in the next financial year and beyond.
I would also like to thank all of our advisers and service providers who have supported the Company admirably during the last year. I am pleased to report that, despite the difficulties presented by the COVID-19 pandemic, there was no noticeable change in any of the services provided to the Company, and the Board has confidence that our suppliers' operational resilience will ensure this continues to be the case until normal operations are restored.
Finally, I wish all of our shareholders good health and prosperity as we gradually move beyond the current phase of the pandemic.
Mark Pacitti
Chairman
15 March 2021
Business Review
This Strategic Report has been prepared in accordance with the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 to provide information to shareholders to assess how the Directors have performed their duty to promote the success of the Company.
The Strategic Report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.
Purpose, strategy and business model
The Company is registered in England and Wales and is an externally managed investment trust; its shares are premium listed on the Official List and traded on the main market of the London Stock Exchange. It was established by its Investment Manager, Fundsmith LLP and listed on 19 October 2018.
The purpose of the Company is to provide a vehicle for investors to gain exposure to a portfolio of small and mid-sized listed or traded companies globally, through a single investment.
The Company's strategy is to create value for shareholders by addressing its investment objective, which is to provide shareholders with long-term growth in value through exposure to a diversified portfolio of shares issued by listed or traded companies.
The Company is an alternative investment fund (“AIF”) under the European Union's alternative investment fund managers' directive (“AIFMD”) and has appointed Fundsmith LLP as its alternative investment fund manager (“AIFM”).
As an externally managed investment trust the Company has delegated its operational activities to specialised third party service providers who are overseen by the Board of non-executive Directors. Details regarding the Company's key third party service providers are included in the Management Engagement Committee Report. The Company has no executive directors, employees or internal operations.
Investment Objective and Policy
Investment objective
The Company's investment objective is to provide shareholders with long term growth in value through exposure to a diversified portfolio of shares issued by listed or traded companies.
Investment policy
The Company's investment policy is to invest in shares issued by small and mid-sized listed or traded companies globally with a market capitalisation (at the time of investment) of between £500 million to £15 billion (although the Company expects that the average market capitalisation of the companies in which it invests to be approximately £7 billion). The Company's approach is to be a long-term investor in its chosen shares. It will not adopt short-term trading strategies. Accordingly, it will pursue its investment policy by investing in approximately 25 to 40 companies as follows:
(a) the Company can invest up to 10 per cent. in value of its gross assets (as at the time of investment) in shares issued by any single body;
(b) not more than 20 per cent. in value of its gross assets (as at the time of investment) can be in deposits held with a single body. This limit will apply to all uninvested cash (except cash representing distributable income or credited to a distribution account that the depositary holds);
(c) not more than 20 per cent. in value of its gross assets (as at the time of investment) can consist of shares issued by the same group. When applying the limit set out in (a) this provision would allow the Company to invest up to 10 per cent. in the shares of two group member companies (as at the time of investment);
(d) the Company's holdings in any combination of shares or deposits issued by a single body must not exceed 20 per cent. in value of its gross assets (as at the time of investment);
(e) the Company must not acquire shares issued by a body corporate and carrying rights to vote at a general meeting of that body corporate if the Company has the power to influence significantly the conduct of business of that body corporate (or would be able to do so after the acquisition of the shares). The Company is to be taken to have power to influence significantly if it exercises or controls the exercise of 20 per cent. or more of the voting rights of that body corporate; and
(f) the Company must not acquire shares which do not carry a right to vote on any matter at a general meeting of the body corporate that issued them and represent more than 10 per cent. of the shares issued by that body corporate.
The Company may also invest cash held for working capital purposes and awaiting investment in cash deposits and money market funds.
For the purposes of the investment policy, certificates representing certain shares (for example, depositary interests) will be deemed to be shares.