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Smithson Investment Trust has smashed the FTSE 100. Is there still time to buy?

You don’t need me to tell you that 2020 has been a pretty awful year for the FTSE 100 so far. Despite the huge bounce seen in equities since mid-March, the top tier of UK companies is still 17% below where it was at the beginning of January.

That’s disappointing in itself but even more so when compared to the performance of the Smithson Investment Trust (LSE: SSON). In sharp contrast, the latter’s shares are now 12% up since the beginning of the year. 

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What explains this outperformance? And more importantly, can it last? 

Remind me about Smithson 

Smithson was launched to great fanfare by Fundsmith CEO Terry Smith back in 2018. While all investment decisions are, for the time being, still run past the celebrated stock-picker, the day-to-day management of the trust is now in the hands of ex-Goldman Sachs man Simon Barnard.

Of course, top managers rarely come cheap. In sharp contrast to the 0.07% or so in fees charged by passive investing giants like iShares for running a FTSE 100 exchange-traded fund, Smithson charges 0.9%.

Since high fees can prove a huge drag on returns, investors therefore need to be confident that they’re getting value for money. So far, this hasn’t been an issue. Since its inception, the share price has climbed 44%. 

Why is it smashing the FTSE 100?

As you might expect, it’s all down to what’s in the portfolio.

Smithson invests in high-quality companies ranging between £500m and £15bn in value. UK-based holdings include tonic water maker Fevertree, property portal Rightmove and takeaway titan Domino’s Pizza. All have a history of generating fat margins and high returns on the money invested by management. These are just the sort of things investors are willing to pay a premium for right now. 

The trust is also concentrated, with just 31 stocks in the portfolio at the end of May. This makes it potentially more volatile than a FTSE 100 tracker. But assuming Barnard and co come up trumps with their picks, however, it’s potentially far more rewarding for investors. 

Naturally, the UK’s top tier contains some great companies. Unfortunately, there’s also quite a bit of low-growth, high-debt, cyclical stuff holding returns back too. 

So, is Smithson still a buy?

I think this really depends on how long you intend to stay invested. 

Smithson has had a great run relative to the FTSE 100, but the near-term outlook is far from certain. Another market crash can’t be ruled out, especially as the full economic impact of the coronavirus pandemic becomes clear. This is particularly relevant for the trust given that almost half of its cash is invested in the US market where valuations are beginning to look stretched once again.

Let’s not forget that, despite its performance in 2020 so far, Smithson wasn’t immune to March’s sell-off. From 19 February to 18 March, the shares tumbled almost 35% in value. 

As a long-term Foolish investor, however, none of the above bothers me all that much. Unless Smithson’s team starts deviating from its strategy of buying quality at reasonable prices and doing nothing else, I don’t intend to touch my holding for many years. This is the case even if the profits I’ve made so far are temporarily lost.

And while I wouldn’t necessarily pile in to the shares right now, I do think new, patient investors could still make great money in the long run.

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Paul Summers owns shares in Smithson Investment Trust PLC and Rightmove. The Motley Fool UK has recommended Domino's Pizza and Rightmove. 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.

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