Smithson (SSON ) is refocusing on the smaller companies in its universe after a year of ‘mediocre’ performance that put the strategy behind its benchmark for the second time since the trust’s 2018 launch. 

The £1.9bn global small- and mid-cap equities fund, managed by Simon Barnard of Fundsmith, saw its net asset value (NAV) grow just 2.1% in 2024 and the shares rise 4.9%, significantly lagging the 11.5% increase in the MSCI World Small and Mid Cap benchmark.

In a letter to Smithson investors – which follows Fundsmith boss Terry Smith’s own annual missive – Barnard said that, after a sell-off at the end of the year, their 2024 performance could ‘only be described as mediocre’.

To some extent, he blamed higher-for-longer interest rates and rising US bond yields, as well as the US Federal Reserve signalling few interest rate cuts in 2025, as the main headwinds, but admitted there was a ‘lack of outstanding winners getting the portfolio motoring’.

This has prompted Barnard to narrow his investment focus. He previously concentrated on companies of between £500m to £15bn, but is now focusing attention on businesses ‘in the lower half of this range, driven by the fact that many of our companies have grown quite large during our period of ownership’.

‘It makes intuitive sense to us that a good small company has a much greater probability of increasing in value multiple times than a large one,’ he explained.

Barnard made a number of changes to the portfolio in the second half to fit his tweaked investment strategy, snapping up new positions in MonotaRO and Medpace.

MonotaRO is an online retailer selling goods including safety clothes, tools and office furniture, and is the largest online reseller in Japan in a largely offline market, providing ‘a good path to growth’. Furthermore, US company WW Grainger holds a 50% stake and was ‘so impressed’ by the technology that it has licenced it for its own US online business.

Barnard also acquired a stake in Medpace, which supports pharmaceutical biotech drug trials and R&D in the US. He said Medpace operates in the fastest-growing part of the pharma industry.

‘These small companies typically opt for full-service contracts given a lack of internal infrastructure, and such contracts often carry the highest margins, making Medpace one of the fastest growing, highest margin and highest return contract research organisations in the industry,’ he said.

The positions were funded by the sale of Australian software company TechnologyOne, which has increased in share price by five times since Barnard bought it and was ‘trading at a valuation we could no longer justify’.

He also sold cybersecurity group Fortinet after it increased four times since 2020 and tipped over £60bn in market valuation, ‘making it an appropriate source of capital with which to acquire smaller companies’. Both Fortinet and TechnologyOne were top contributors over the year.

Lastly, Cognex, a US maker of scanning and sensor equipment, was sold in the past six months due to its exposure to ‘deteriorating economic conditions in China and the global autos sector’ while remaining on a ‘lofty multiple’.

Swiss banking software company Temenos was also sold, but not because it had become too big – the stock was the biggest detractor across the year and caused ‘much frustration over the first few months of the year’.

Barnard said the group will ‘require more investment in the short and medium term to fix a badly managed transition to a software as a service (SAAS) business model, which will likely place pressure on both margins and returns over the coming years’.

UK-based industrial business Spirax (SPX) was also a detractor as it became a ‘victim of slowing global industrial production growth over the last couple of years, which has continued falling’.

‘Still, the latest trading statement showed some acceleration in group revenue growth, with all business units now growing again, which we take as a positive early sign of recovery,’ said Barnard.

The manager admitted performance in 2024 was ‘far from what we expect’ but said using a ‘systematic and disciplined focus’ and an ‘incessant determination to leave no stone unturned’ would ultimately deliver long-term returns.

From launch in October 2018 to end of the 2024, the trust’s underlying portfolio has delivered a 63.2% return, which is about 1% behind the benchmark. At 48.4%, shareholder total returns have been weaker, however, as the trust has slid to a nearly 12% discount today. 

Numis analyst Ash Nandi said that the board – which got itself into hot water after failing to offer a continuation vote last year – was committed to buying back shares or offering continuation votes should the discount average more than 10% over the year.

‘The fund benefits from a high-profile management group, popular with both retail investors and wealth managers alike,’ Nandi said. ‘We note that there have been some changes to the team, with Kurran Aujla joining as an analyst after Will Morgan’s departure.’

‘We continue to believe that Smithson is potentially an attractive investment opportunity,’ added the analyst at Numis, which put Smithson on its recommendations list in early 2024.