Smithson beat its indices (e.g. the FTSE 100 index), a level of return (e.g. the Bank of England base rate) or the performance of other competing companies.
Investment Managers often use the Benchmark as a reference point for the amount that they hold in stock in their portfolio and as a risk control. if the portfolio held the same proportions of stocks as the index, its performance would track that of the index. If the investment manager chooses to own more or less of the stock than the index he / she is taking an active position.
” class=”glossary_term”benchmark in 2021 – Over the course of 2021, Smithson generated a return on net asset value
” class=”glossary_term”NAV of 18.9% and a return to Investment Managers as Benchmarks and by investors to compare performance.
” class=”glossary_term”dividend (the fund is not managed to produce income). The trust issued over £530m worth of new shares over 2021.
The way that the trust is managed is not changing, but the Read our guide to Boards and Directors
” class=”glossary_term”board want to clarify the investment policy and so plan to tweak the wording so that it reads “The company’s investment policy is to invest in shares issued by small and mid-sized quoted companies but not all UK quoted companies are listed.
” class=”glossary_term”listed or traded companies globally with a shares in issue of a company, calculated by multiplying the share price by the number of shares in issue.
” class=”glossary_term”market capitalisation (at the time of initial investment) of between £500m to £15bn.”
Extract from the manager’s report
” class=”glossary_term”portfolio only holds high quality companies – more on which later – but included in these are a number of high growth companies which naturally have higher ratings than the market average. This means that in a year when US 10 year treasury yields increased by 66%, from 0.91% to 1.51%, we should theoretically have underperformed the broader Index. This is because high interest rates reduce the value of the future earnings of these companies once discounted back at the higher rates. The slower growing companies in the Index are less affected by this phenomenon, which is why many commentators have been discussing a stock market ‘rotation’ into lower rated companies, or ‘value’ stocks.
What enabled the portfolio to keep up with the Index then? The answer is that on this occasion there were a number of companies that performed well for individual reasons. It is also the case that sometimes financial theory proves to be just that, a theory, which doesn’t actually play out perfectly in the financial markets, driven as they are by millions of fallible, emotional people. Indeed, our highest rated company was one of the best performers last year, up over 30%. This also serves to remind us that ‘highly rated’ does not automatically equate to ‘expensive’ – it always depends on what you are getting for the price. Having said all this, we still consider ourselves fortunate to have outperformed in this environment, and if this trend of increasing interest rate expectations persists, we may not continue to be so lucky.
One might then ask, if interest rates are so obviously on the rise, and this so obviously creates a more favourable environment for value companies rather than quality or growth companies, shouldn’t we adapt our strategy to buy the companies which stand to benefit? Well, no. Owning high quality companies with sustainable growth is a winning strategy over the long term, has been shown to work through several economic cycles, and is one which we know we can execute successfully. Whilst other managers may be able to run a value strategy, we believe it is inherently more difficult, as you cannot hold value companies for the long term if all you are doing is owning a poor quality company at a low price, which you hope will re-rate in the future. If this does happen (there is no guarantee), you then have to sell the company to find another such investment, and so on. This means that unlike our strategy, time is not your friend, because the longer you are holding the company and waiting for it to re-rate, the lower your annualised returns become, and if you’re particularly unlucky, the worse the company becomes. On the other hand, it matters less if it takes more time for the market to appreciate the value of the type of companies we hold in our strategy, because the highest quality companies are constantly getting better, or at the very least bigger, owing to their growth. So, once we have found the right companies, all we have to do is wait. We think that patience is one of our competitive advantages, because with the strategy we employ, it tends to pay off.
Imagine a dog walker crossing a field, their dog wildly zigzagging around them. We would relate the companies we own to the walker, clear in direction and making steady progress across the field, while the daily market price is like the dog, moving back and forth quite randomly. Now, the current economic storm may well send the dog cowering for cover, but given enough time, we know that the price and value will eventually meet again, just as the dog and walker will ultimately leave the field together. We also know that, as well as making constant progress, a high quality company, if it trips during the storm, will rise again and keep going. Low quality, value companies on the other hand, may never get back up.
Of course, interest rates are on the rise because central banks are trying to contain inflation, which many fear may not be transitory, as first thought. It is worth mentioning that we do not fear moderate inflation, which by itself would likely not cause a significant problem for our companies. This is owing to a couple of reasons. First, the companies we own have high gross margins, and therefore low raw material costs. They also tend to have low capital requirements, which allows them to generate high returns on that capital. As inflation affects both the cost of raw materials and the cost of plant and equipment, those that spend less as a proportion of revenue on these items will be relatively less impacted by cost inflation. On top of this, the market structure and competitive positioning of many of our companies mean that they would also be in a position to raise the prices charged to their customers should the costs of the business…