Star UK fund manager Terry Smith announced last week that he will be launching his third fund – Fundsmith Smithson – the closed-end fund will invest in around 30 small and mid-sized global companies – it will not be managed by Smith but by Simon Barnard and Will Morgan, who joined Fundsmith in 2017 from Goldman Sachs.
Smithson is looking to raise £250m, with Smith investing £25m himself, alongside a further £5m invested by Fundsmith employees.
The portfolio will be built around small- and medium-sized companies between £500m and £15bn in market capitalisation; the average market cap for the trust’s holdings is expected to be around £7bn.
Barnard said the team behind the trust has identified an investable universe of 83 companies but that the portfolio will choose around 25 to 40 of these at launch.
Smith says the reason for setting up this fund is due to investor demand, in an interview with fund research firm Morningstar UK, he said: “Over the past 20 years, global small sized companies have outpaced global large caps – with an annualised return of 9.3% to large caps’ 6.2%.
“The firm says it is seeking to exploit this performance differential, along with the comparative lack of analysis in the sector, making it easier for Fundsmith to “to take advantage of more discrepancies between the share price and valuation.”
Indeed, according to recent data from FE Analytics, over the last decade (2008-18), investors in smaller companies have experienced broadly better risk-reward profiles than those invested in their large-cap peers.
IA UK Smaller Companies is the fourth-best sector for Sharpe ratio (0.64), with returns of 234% while experiencing volatility of 14.61%. Similarly, the IA European Smaller Companies sector is next with investors receiving 200% in total returns on volatility of 17.18% and a Sharpe ratio of 0.47.
The IA North American Smaller Companies sector has actually outpaced its large-cap peers, returning 275%. However, it has been a lot more volatile (16.43%), giving it a Sharpe ratio of 0.65.
Dennis Hall, chartered financial planner (CFP) at Yellowtail Financial Planning says: “There is a lot of academic research to back up the long term out performance of small cap stocks versus large cap stocks, and by that I mean FTSE 250 companies versus FTSE 100 companies – you don’t have to venture into the AIM market to do this.
“For a long-term ‘buy and hold’ investor like Terry Smith it makes perfect sense to invest in the long term out performance potential that global small and medium cap stocks offers. This isn’t a new phenomenon, there are many other successful managers and funds who have followed this strategy, and it suits Terry Smith’s style.”
Fundsmith Smithson will charge 0.9% a year, linked to the trust’s size. There will be no launch fee.
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Sabuhi Gard is an investment writer at Incisive Works
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