Terry Smith, manager of the £18 billion Fundsmith Equity fund is to launch a new investment trust.
The Smithson investment trust is the fourth investment vehicle to be launched by the veteran investor.
Smithson will focus on companies smaller than those found in the flagship Equity fund and will seek to raise up to £250 million from investors as it floats on the stock market. Smith will invest £25 million of his own money into the trust at launch and Fundsmith LLP will bear the costs of launching the trust.
The annual charge of the trust will be based on its market capitalisation rather than its net asset value (thereby reflecting sentiment and share price performance as opposed to performance of the underlying investments) and will be 0.9%.
While Smithson will be run under the Fundsmith brand, it will be the first vehicle offered by the investment house to be managed by someone other than Terry Smith. The team will be led by investment manager Simon Barnard and assistant investment manager Will Morgan, with Smith providing advice and support in his capacity as chief investment officer of Fundsmith.
Mr Barnard and Mr Morgan were hired from Goldman Sachs last year to research the opportunity of “applying Fundsmith's process to companies typically smaller than the ones the Fundsmith Equity fund would invest in.”
The Smithson trust will invest in equities across the globe, focusing on small and medium-sized companies with a market capitalisation of between £500 million and £15 billion – the average holding is expected to have a market cap of £7 billion.
Mr Barnard says: “Over the last year, the Smithson team has identified and researched an investable universe of 83 compelling companies, from which we will select 25 to 40 portfolio companies at launch, that we believe can compound in value over many years, if not decades. I, along with other members of the team, will be investing significantly at launch.”
The MSCI World Smid (small and mid) Cap index has grown at an annual rate of 9.3% over the past 20 years, compared to 6.2% from the MSCI World Large Cap Index. With the effects of compounding, an investment in the former would have grown 80% more than the latter over the past two decades.
As well as that, Fundsmith says the fact that fewer research analysts are looking and small- and mid-cap companies means there are more opportunities to take advantage of. It also points out that these smaller businesses can bring greater volatility and risk.
The new trust will be run according to the same investment strategy as the rest of the suite: buy good companies, don”t overpay, do nothing.
Terry Smith, chief executive officer at Fundsmith, says: “I am delighted that Simon and Will will manage the fund, with my oversight. I will be investing £25 million in Smithson at launch, with fellow Fundsmith partners and employees investing an additional £5 million.”
The trust will start trading on the stock market from 19 October.
This article was first written for our sister magazine, Money Observer.