Smithson misses out on 'useful bubble' in AI

Smithson (SSON) gave back its first half gains in the second part of 2025 as global small-caps took a backseat to the rise of a ‘useful bubble’ in mega-cap tech names.

The £1.6bn trust, which plans to delist and turn itself into an open-ended fund this March, is leaving the London Stock Exchange on a downbeat note.

Its interim results to the end of December 2025 revealed a 1.8% decline in net asset value (NAV), while the share price rose 5.6%, largely on the back of the decision to transition to an open-ended fund. Both the NAV and share price fell short of the 10.2% gain in the benchmark MSCI World Small and Mid Cap index.

The negative NAV was a far cry from the gains made in the first six months of 2025, which manager Simon Barnard said was ‘very disappointing’.

He expressed ‘unhappy bemusement’ as the more the quality of a stock increased, the worse it performed, with loss-making companies up 18% on average over the half year.

‘This suggests that the strategy of buying high quality small and mid-capitalisation companies did not work this year,’ he said.

‘But while disappointing in the short term, being so different from the market could prove to be useful diversification for shareholders when this particular environment changes.’

Barnard blamed speculation and risk-taking for throwing the index out of kilter, particularly as artificial intelligence (AI)-linked stocks boomed. He has looked at the top AI-exposed companies in his universe and said just three ‘would currently meet the most basic fundamental requirements for portfolio inclusion’.

He acquired only one, Vertiv Holdings, and it ‘turned out to be the best performing of these, and a strong contributor to the portfolio’.

The provider of customised liquid cooling and power equipment for data centres rose 71% since purchase in May to the end of December, but Barnard said both UK-listed stocks, Halma and Diploma, also generate revenue from AI data centres.

‘We also own an Italian IT consultancy business called Reply, which is increasingly employed by large corporates to integrate AI applications into their technology systems,’ he said, adding that the portfolio has a total weighting of 5% to AI-exposed companies.

Barnard maintains a large underweight to the AI theme amid concerns that ‘speculative activity is forming’ with AI start-ups rapidly soaring to billion-dollar valuations and AI companies loaning companies to customers in order to buy their own products.

He said ‘of course’ there was a bubble but confirmed it was a ‘useful bubble’, akin to what Amazon founder Jeff Bezos described as an ‘industrial bubble’ that was seen in the dotcom boom in 2000 and the ‘railway mania’ of the 1840s.

‘Whatever happens next to asset prices, at least we will be left with a useful technology to benefit mankind,’ said Barnard.

In order to benefit, managers must have some exposure but still invest in companies that fit with their strategy, which in Barnard’s case means strict quality criteria.

Vertiv was purchased on 21 times forward price/earnings after the share price had fallen on the back of US tariff announcements.

‘But it does mean that if share prices and valuations continue to increase at the current rate, it is likely that our exposure to this theme will decrease over the coming year, rather than increase,’ he said.

Barnard’s strategy remains entrenched: ‘Buying good companies, not overpaying and holding for as long as possible to allow our investments to compound in value.’

The portfolio remains ‘the cheapest it has ever been relative to market’ and one silver lining of the poor performance the trust has suffered of late means that it easier to uncover ‘attractively valued, high quality growing companies that will one day become much larger, and potentially higher rated’.