The manager of Smithson (SSON ) investment trust made an ‘atypical investment’ in beauty and wellness company Oddity as he finished rejigging his portfolio, removing information technology companies in favour of industrials. 

In his annual letter to shareholders, Fundsmith’s Simon Barnard said the portfolio was in the ‘best shape it has been in since inception’ as he expounded on changes in the concentrated portfolio of roughly 30 companies. 

Turnover, excluding share buybacks, was 27.2% in 2023, significant for the buy-and-hold investor but significantly less than the 48.5% undertaken in 2022 when the manager first started to overhaul the portfolio. 

This followed a challenging period for the £2.2bn trust as rising interest rates hit the global portfolio of small- and mid-cap stocks. Shareholder returns slumped 15% in the two years to date, according to Morningstar data, as the discount to net asset value (NAV) widened as far as 14%.

Odd choice

Barnard and fellow manager Will Morgan took advantage of low valuations in 2023 to add five new companies to the portfolio, including Oddity, which the pair bought at its intial public offer (IPO), the first they have participated in and something they ‘did not do lightly’.  

‘We got to know the management several months before the IPO as we were approached directly by the company after they had been made aware that the business exhibited much of what we look for in a high-quality, growing company,’ Barnard wrote. ‘We were extremely impressed by the track record as well as the potential opportunity for the company.’

In particular, the manager highlighted that Oddity has built AI technology using data from its users to learn how to match the right products to consumers, which is a ‘strong indication of the value of their service but is also much more profitable’.

Trading tech

While Oddity was in part chosen for its use of technology, the fund’s overall exposure to information technology fell from the top sector position for the first time since October 2018, when the trust was launched. 

Industrials took the top spot, making up 36% of assets following the purchase of manufacturer Graco and consulting business Exponent. Weightings were also shifted as the MSCI also reclassified human resources software company Paycom from technology to industrials and Sabre from technology to consumer.

A total of five companies were added to the portfolio, with household goods company Clorox and UK chemicals business Croda rounding out the list. These were funded through the selling of Domino’s Pizza, Nick Train’s recent purchase Rightmove and healthcare company Masimo

‘It has been a busy 12 months, taking advantage of low prices during the weak market to improve and diversify the portfolio. After these actions, we are unashamedly enthusiastic about what we now own,’ Barnard (pictured below) wrote.

Shares in the trust soared 20% at the end of 2023 along with the wider market as investors bet interest rate cuts were on the horizon, but have softened 1.3% this month as that optimism looked far-fetched. On Wednesday the shares were trading 11% below NAV.

The board has maintained a buyback programme since the initial derating, acquiring 10.3% of shares in issue for £242m over the last two years.

Analysts recommend 

Investec analyst Alan Brierley maintained a ‘buy’ recommendation, pointing out that a recent BlackRock study showed ‘quality’ materially outperformed the rest of the market – most notably higher risk equities – on six occasions after peak rates between 1984 and 2021. The report also found that smaller quality is now priced significantly below its long-run average.

‘In an uncertain economic environment, with highly elevated geo-political risks, we like the focus on quality growth,’ Brierley said. ‘Meanwhile, in the latest letter to shareholders, we were encouraged to read that the manager believes the portfolio is in the best shape since IPO.’

The team at Deutsche Numis also backed Smithson, including it in their top picks for 2024. The analysts said the shares offer value and point to the improved performance since 2022. 

‘We believe the manager, Simon Barnard, has learnt lessons from 2021, when he was caught holding numerous stocks with high valuations, as well as some stocks with small operational issues that should have acted as red flags,’ the note said. 

Since launch, the trust has delivered total returns of 58% versus the benchmark’s 47%, while the shares have climbed 37%.