Just over a month ago, I said I’d continue buying Scottish Mortgage Investment Trust even if its share price were to temporarily reverse. As luck would have it, an opportunity came about only a few days later. Between February 15 and March 5, SMT’s valuation dropped more than 30%.
Now, this fall wasn’t a complete surprise considering that frothy tech stocks make up much of its portfolio. Nevertheless, I duly jumped at the chance to top up my holding. But the Scottish Mortgage isn’t the only investment trust I’ve been buying more of in recent weeks.
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FTSE 250 stunner
In sharp contrast to Scottish Mortgage Investment Trust’s 112-year history, Smithson Investment Trust (LSE: SSON) is still in its infancy. Part of the Fundsmith stable, SSON has only been around since October 2018. Even so, a quick look at its performance should explain why it has already gained a market cap of £2.4bn and inclusion in the FTSE 250.
According to its latest factsheet, Smithson has achieved an annualised return of 21.3% since inception. However, quite a bit of this stunning return can be attributed to how the trust performed last year.
Over the course of 2020, the share price increased by 31.7%. For comparison, Smithson’s benchmark — the MSCI World Small and Mid Cap Index rose by 12.2%. Even more startling was that cash climbed just 0.3% in value — further evidence that holding anything in cash beyond a ‘rainy day’ fund will never make me rich.
This result is yet another ‘win’ for Terry Smith. The strategy adopted by Smithson is identical to that of his much-larger Fundsmith Equity Fund, even though he’s not involved in the day-to-day running of the former. In other words, it buys quality companies at good prices and then does nothing. In practice, this means having exposure to UK firms such as Fevertree, Domino’s Pizza and Rightmove. US-listed consumer credit business Equifax and laser-specialist IPG Photonics also make the cut.
But can this form continue?
In the near term, it’s impossible to say and that’s a risk for buyers of this trust. Just like individual company stocks, the performance of investment trusts can vary wildly from year to year. Indeed, manager Simon Barnard has already sought to quell expectations by suggesting that 2020’s performance will likely prove an anomaly.
This seems very sensible to me. After all, almost half of Smithson’s portfolio is made up of technology stocks and that means volatility. As anyone with an interest in the stock market will probably be aware, these aren’t the flavour of the month at the moment. Thanks to the gradual rollout of coronavirus vaccines, it’s beaten-down leisure and travel stocks that are now attracting more attention.
Then again, SSON’s share price has held up far better than that of Scottish Mortgage Investment Trust. At the close of play last Friday, the former was only 5% below where it stood at the start of the year.
Sure, a lot of this may be down to Smithson being geared towards investing in small and mid-cap companies. Unlike Scottish Mortgage, it has no interest in the likes of Tesla and Amazon. Nonetheless, I think this relative stability bodes well, especially for those investors who don’t want to spend too much time nursing their portfolio.
With a proven investment approach and a relatively young management team, I’m backing Smithson for the long term.