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Why I’d buy Smithson Investment Trust over a FTSE 100 tracker

Regular readers will know we’re very positive on funds that track the market return. Not only do they offer a cheap way of getting exposure to equities, bonds, property and more, they also tend to outperform the majority of active managers (i.e. professional stockpickers) once fees have been deducted. 

This isn’t to say active funds aren’t worth bothering with. One good example, as far as I’m concerned, is the Smithson Investment Trust (LSE: SSON), managed by Simon Barnard.

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Here are three reasons why I’m invested and plan on holding for many years.

Winning approach

One of the biggest draws of Smithson is the fact that Barnard adopts an identical approach to its highly popular (and highly successful) ‘big brother’ Fundsmith Equity Fund, run by Terry Smith. Buy great companies, try not to overpay, and then do nothing. 

By great companies, we’re talking about those capable of generating returns on capital employed far higher than the market average (something Warren Buffett suggests investors spend more time looking at). Among other things, they also need to have growth potential and low or no debt.   

While there are certainly some good companies within the FTSE 100, there are also some that generate poor returns on the money they invest, are weighed down by debt and/or offer very little in terms of growth. A drawback of the tracker, then, is you’re forced to buy these as well as the good stuff.

Concentrated portfolio

If I’m paying a manager far more in fees than I would for a tracker (0.9% for Smithson, compared to just 0.07% for the FTSE 100), I want to know they’re earning their money. You can’t outperform the index if the fund replicates the index.

That’s why one of the key things I look for before investing is the number of holdings it has. Here, I’m looking for a fairly low number since this would indicate the manager is only investing in their best ideas. Smithson had just 29 holdings at the end of January. 

A potential issue with having a limited number of stocks is that a few might experience problems, thus having a greater impact on returns compared to a FTSE 100 tracker, which will spread your cash around more companies. Then again, Fundsmith’s strategy of investing in quality defensive stocks has led it to beat its benchmark even during less stellar years. This bodes well for investors in Smithson, even though its portfolio of small- to medium-sized companies may be more volatile.

Great performance

Smithson was only launched in mid-October 2018. As such, it’s far too early to say whether the trust will perform as well as Fundsmith Equity. Moreover, both are still to be tested by a severe and sustained market downturn of the like we experienced from 2007 to 2009. 

Having said this, the performance so far has been encouraging. From inception to the end of last month, Smithson’s share price had climbed 29.4%. That compares very favourably to a 10.2% return achieved by its benchmark — the MSCI World SMID Index. Over the same period, the FTSE 100 was up a little over 3%.

Although the coronavirus outbreak will have put a brake on gains since, this return gives me confidence that Barnard knows what he’s doing. As such, I’m more than content to continue drip-feeding money into Smithson as the months pass. 

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Paul Summers has positions in Smithson Investment Trust and Fundsmith Equity fund. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.