‘Underperforming’ Smithson Investment Trust is now my biggest holding

Smithson Investment Trust (LSE: SSON) is now the biggest holding in my SIPP (Self-Invested Personal Pension). That’s despite it significantly underperforming its benchmark over the first half of 2021. Let me explain why.

What’s Smithson all about? 

For those unfamiliar with Smithson, it’s a FTSE 250-listed trust that’s been around since October 2018. It invests in small- and mid-cap companies from around the world, adopting an identical strategy to its stablemate Fundsmith Equity.

Like its big brother, Smithson aims to find great companies, buy them at a reasonable price, and then kick back. Sadly, such businesses are fairly rare, at least according to manager Simon Barnard. A portfolio of just 32 investments shows how selective he is.  

Unfortunately, this strategy hasn’t worked as well of late. Last week’s half-year report confirmed that Smithson Investment Trust had underperformed in the first six months of 2021. The share price total return was 4.1%. This was less than a third of that achieved by its benchmark (the MSCI World Small and Mid Cap Index). The latter rose 12.4%.

So, why am I so bullish? It’s a fair question, especially as employing an active manager also means paying fees. Here’s my reasoning.

1) Underperformance is inevitable

Just as no share price rises in a straight line, no investment strategy works every day/month/year. While tech stocks performed incredibly in 2020, we know that value plays were the winners in the early part of 2021. As vaccination programmes progress, this trend could continue into 2022. Or it may stop — we simply don’t know.

Since I can’t time the markets for toffee, it makes more sense to align myself to a strategy that I can see myself sticking to. For me, this is the quality-focused approach championed by Smithson and something I try to apply to my own stock screening. To paraphrase billionaire investor Warren Buffett, I’d prefer to snap up an awesome business at a fair price than something that just looks ‘cheap’.

2) Exposure to small-cap winners

As someone who hopefully has several decades left in the market, I want to be sure I’m backing stocks (and funds) that are capable of really growing my cash. For me, this means avoiding much of the FTSE 100 and S&P 500 and looking lower down the market spectrum.

Defintitions of ‘small-cap’ and ‘mid-cap’ vary around the world (Smithson’s average market-cap is actually £11.3bn!). Nevertheless, what’s important here is holding businesses that have a good chance of growing earnings at a faster clip than your typical market giant.

Such an approach carries risk. While some research has shown that returns from smaller stocks have been better historically, this has been at the expense of considerable volatility. That’s important to remember if we have another market wobble.

3) Track record

This last point is key. Despite recent performance, Smithson has still managed to deliver a staggering annualised return of 25.1% since inception to the end of July. The aforementioned benchmark managed ‘just’ 13%. 

Now, can Smithson sustain this sort of return over many years? I doubt it. As such, I’ve already prepared myself to expect a moderation in performance as time goes by. I’m also still sufficiently diversified elsewhere. Having conviction is one thing, but assuming that past performance must predict the future is the ultimate investing folly. 

Even so, I can’t see Smithson Investment Trust losing its top spot soon.