Annual Financial Report
28/02/2023 07:00
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RNS Number : 2105R Smithson Investment Trust PLC 28 February 2023
SMITHSON INVESTMENT TRUST PLC
LEI: 52990070BDK2OKX5TH79
RESULTS ANNOUNCEMENT
Audited results for the year ended 31 December 2022
Performance Highlights
At At
31 December 2022 31 December 2021
Net assets £2,417,967,000 £3,367,070,000
Net asset value ("NAV") per ordinary share ("share") 1,410.7p 1,961.0p
Share price 1,308.0p 2,020.0p
Share price (discount)/premium to NAV(1) (7.3)% 3.0%
For the period from
Company's listing on
For the year ended For the year ended 19 October 2018 to
31 December 2022 31 December 2021 31 December 2022
% change(2) % change(2) % change(2)
NAV total return per share(1) -28.1% +18.9% 41.1%
Share price total return(1) -35.2% +18.1% 30.8%
Benchmark total return(3) -8.7% +17.8% 34.9%
Ongoing charges ratio(1) 0.9% 1.0% -
Source: Bloomberg
This report contains terminology that may be unfamiliar to some readers. The
Glossary in the Annual Report gives definitions for frequently used terms.
4 Year Record
At 31 December 2022 2021 2020 2019
Net assets £2,417,967,000 £3,367,070,000 £2,331,950,000 £1,437,305,000
NAV per ordinary share 1,410.7p 1,961.0p 1,648.9p 1,255.2p
Share price 1,308.0p 2,020.0p 1,710.0p 1,298.0p
Share price (discount)/ premium to NAV(1) (7.3)% 3.0% 3.7% 3.4%
Year ended 31 December
NAV total return per share(1) -28.1% +18.9% +31.4% +33.2%
Share price total return(1) -35.2% +18.1% +31.7% +29.8%
Benchmark total return(3) -8.7% +17.8% +12.2% +21.9%
Ongoing charges ratio(1) 0.9% 1.0% 1.0% 1.0%
1 These are Alternative Performance Measures ("APMs"). Definitions of these,
together with how these measures have been calculated, are disclosed in the
Annual Report where it is made clear how these APMs relate to figures
disclosed and calculated under IFRS.
2 Total returns are stated in GBP sterling.
3 MSCI World SMID Cap Index, £Net Source: www.msci.com (http://www.msci.com)
.
Chairman's Statement
Introduction
I am pleased to present the Annual Report of Smithson Investment Trust plc
(the "Company") for the year to 31 December 2022. This is our fourth Annual
Report, and the first year in which the Company's net asset value has fallen.
Whilst this decline is disappointing, it comes against the backdrop of a steep
decline in markets across the world. The Company's net asset value per share
has, however, fallen by more than the MSCI World SMID comparator index in
2022, the first year this has occurred, and the Company's shares have traded
at a discount to net asset value through most of the year.
There are two points which are worth emphasising, both of which are covered in
greater detail in the Investment Manager's Review. Firstly, our portfolio
companies grew their businesses in 2022 despite the difficult market
conditions and their financial key performance indicators were all materially
better than those of the comparator index, demonstrating their characteristics
as high quality companies. Unfortunately, the progress made by the portfolio
companies was not sufficient to offset the impact on growth company valuations
of the hike in interest rates. Secondly, only two segments of the comparator
index actually registered positive returns in 2022 (Energy and Utilities);
those two segments are therefore largely responsible for the index'
comparatively better performance. The Company does not invest in either of
these segments as they do not meet the Investment Manager's criteria for
potential long term shareholder returns. Whilst it is disappointing to report
on periods when asset values fall, the focus remains on long term value
creation.
The Company's performance and the Board's actions in response to the discount
are summarised below, and the Investment Manager's Review discusses the
portfolio's performance in greater detail.
Performance
The decline in the Company's net asset value (NAV) per share for the year was
28.1%(1), underperforming the MSCI World SMID Index by 19.4 percentage points.
At the interim stage, the fall in net asset value which the Company reported
was 31.7%, so the outturn for the year is after recording a small improvement
in the second half. Despite this significant underperformance, the Company's
annualised NAV per share total return since inception is +8.5%(1), 1.1% higher
than the annualised return from the index with dividends reinvested.
As noted in the Investment Manager's Review, the decrease in portfolio company
valuations during the year was such that at the year end, they were trading on
free cash flow ratings comparable to those at the time of the Company's launch
in 2018. This means that the growth in the Company's net asset value per share
since IPO, which exceeds that of the comparator index, can largely be
attributed to the underlying trading performance of the portfolio companies.
The Company's shares, which traded at a premium to NAV for the vast majority
of the period from launch in 2018 through to the end of 2021, have traded at a
discount for almost all of 2022, and have continued to do so in the first part
of 2023. The discount at the end of the year was 7.3%(1), narrower than the
11.5% at the end of the first half of the year, but representing a very
significant shift down from the 3.0% premium at the end of 2021. Combined with
the negative total return on the NAV, to move from a modest premium to a
discount has resulted in the share price total return for the year of negative
35.2%(1). This has reduced the annualised share price return total return
since inception to 6.6%(1), 1.9 percentage points lower than the annualised
increase in NAV per share.
The Company is a member of the FTSE 250 Index with a market capitalisation at
the end of 2022 of £2.24 billion.
Capital
The Company was floated on the premium list of the London Stock Exchange
("LSE") on 19 October 2018, breaking the record for the largest IPO of an
investment trust in the history of the LSE with funds raised exceeding £822
million. For much of the period from inception through to March 2022 high
demand resulted in the Company's shares trading at a premium to net asset
value. During this time, the Board oversaw the issue of new shares to meet
demand and to manage the premium.
When the Company's shares started trading at a discount in the first half of
last year, the Board, in consultation with its advisers and the Investment
Manager, sought to address the situation through the use of share buy backs.
During 2022 the Company issued 5.4 million new ordinary shares to raise £92.5
million net of costs and bought back 5.7 million ordinary shares at a cost,
after dealing charges, of £74.0 million. The share allotments and buybacks
each represented over 3% of the Company's issued share capital at the start of
the year. All share allotments and buybacks were accretive to the Company's
net asset value per share. The average premium to net asset value at which new
shares were allotted was 2.6% and the average discount to net asset value at
which shares were bought back was 8.7%. The buybacks accounted for over 10% of
the Company's shares being traded on the LSE in the period since the buybacks
started.
The buyback programme is continuing and since the year end up until 22
February 2022 being the latest practicable date before the printing of this
report, a further 1,050,000 shares have been bought back at a cost of £15.0
million after dealing costs, with an average discount to net asset value
of7.5%.
As a matter of law, the Company is only permitted to fund purchases of its own
shares out of its distributable reserves or the proceeds of a fresh issue of
shares; and while the ordinary shares are trading at a price less than the
latest published net asset value per share, the Company is not able to issue
new shares.
As at 31 December 2022, the Company's distributable reserves available to fund
share buybacks were £196.7 million. The Board concluded that it was prudent
to create further distributable reserves to ensure there is no technical
impediment to prevent the Board from being able to continue to undertake share
buybacks when it feels they are appropriate. The Board therefore called a
General Meeting on 6 February 2023 at which shareholders passed a special
resolution to reduce the Company's share premium account and create £500
million additional distributable reserves. An application has been made to the
High Court to sanction the capital reduction.
The Board intends to continue with its current programme of regular market
purchases while the shares trade at a material discount. All shares purchased
are held in treasury and will only be reissued at a premium to net asset
value, net of all costs. Resolutions to replace the existing authorities
granted by shareholders to the Board to allot new shares and buy back shares
will be proposed at the forthcoming Annual General Meeting.
Results and Dividends
The Company's total loss after tax for the year was £967.6 million,
comprising a capital loss of £972.0 million and a revenue profit after tax
of £4.4 million (see Statement of Comprehensive Income).
The revenue profit after tax arises because the Company's dividend income in
the year was higher than its operating expenditure. All the Company's
operating expenditure is charged to revenue, rather than a percentage being
allocated to the capital reserve. This reflects the Company's objective of
focusing on capital growth which means that its accounting policy is not
designed to facilitate maximisation of revenue reserves and dividend payments.
The Company's cumulative revenue reserves were negative at 31 December 2022,
and therefore a dividend is not proposed by the Board.
The Company has never paid a dividend. It should not be expected that the
Company will pay a significant annual dividend and it is likely that no
interim dividends will be declared. The Board intends to declare such annual
dividends as are necessary to maintain the Company's UK investment trust
status.
Investment Approach
In common with all funds managed by Fundsmith, the Company has a simple,
focused strategy of investing in high-quality, listed company shares, seeking
not to overpay for those shares and then holding them as long-term
investments; the Company does not use derivatives and has no borrowings.
As a closed-end investment vehicle focusing on capital growth, the Company is
free to focus its energies on pursuing its strategy without having the
limiting factors of funding client redemptions, dividend payments (other than
a minimum to maintain investment trust status) or gearing concerns. The
Company has a strong balance sheet of highly liquid investments.
The Company expects to hold between 25 and 40 investments; at the year-end it
held 31. The composition of the portfolio at 31 December 2022 is shown in the
Investment Portfolio section, and the Investment Manager's Review explains the
investment approach, and the performance and evolution of the portfolio in
detail.
Investment Policy
At the Company's AGM in April the shareholders approved a revision to the
investment policy, which clarified that the investment restriction as to
market capitalisation range applies at the time of initial investment in a
company and removed the expectation of the average market capitalisation of
investee companies. This change, which came into effect on 3 May 2022, has had
no effect, in any way, on how the Company's investments are managed.
Governance
I took over as Chairman of the Board at the end of February 2022 and Lord St
John of Bletso replaced me as Chairman of the Audit Committee. Jeremy
Attard-Manche joined the Board on 1 March and is Chairman of the Management
Engagement Committee. As part of our succession planning and to broaden the
experience of the Board, Denise Hadgill was appointed as a Director of the
Company with effect from 1 June 2022. We will all stand for election or
re-election at the AGM, and details on our background and experience are given
in the Annual Report.
ESG and Stewardship
During the year I have been asked quite a few questions by shareholders about
the Company's approach to ESG and the stewardship of its portfolio companies.
This is explained in greater detail in the document on the Company's website
entitled ESG Integration, which has also been uploaded to the Association of
Investment Companies website. The Board has delegated responsibility for all
stewardship responsibilities to the Investment Manager and is updated at each
Board meeting on any significant developments or interactions with investee
companies. One of the benefits of holding a comparatively concentrated
portfolio of shares is that the Investment Manager has more time to spend
following developments at each portfolio company and has good and regular
access to the top management in portfolio companies. The Investment Manager,
furthermore, does not delegate voting to any outside agency, regarding this as
an important shareholder responsibility which needs to be undertaken,
thoughtfully, in-house.
Fundsmith is a signatory to the FRC's 'UK Stewardship Code 2020'. Fundsmith's
Stewardship Report 2021, together with the aforementioned ESG Integration
document, are available on the Company's website at www.smithson.co.uk. A few
examples of the engagement with investee company management are given in the
Investment Manager's Review and a report on voting activity is included in the
Strategic Report.
Annual General Meeting ("AGM") and Shareholder Engagement
The Company will hold its AGM on 27 April 2023. My fellow directors and I are
keen to meet with shareholders, and we encourage shareholders to come to the
meeting. May I remind shareholders, whether or not they are able to attend the
AGM in person, that you are welcome, at any time, to submit any questions you
may have for the Board at smithsonchairman@fundsmith.co.uk. Please submit
proxy votes in respect of the resolutions to be proposed at the AGM,
irrespective of whether you intend to attend the AGM.
Simon Barnard, the Company's portfolio manager, will give a presentation at
the AGM which will be recorded and made available on the Company's website
after the meeting. Simon and members of his team will also be able to answer
questions from shareholders at the AGM.
We encourage shareholders to visit the Company's website where more
information is available on the Company.
Outlook
The improvement in the Company's net asset value which commenced in the second
half of 2022 has continued, to date, in 2023. However, uncertainty around
future interest rate rises, high levels of inflation and fears of a recession
are likely to continue in the coming year. Whether the opening of the Chinese
market post the lifting of COVID‑19 restrictions will have a positive impact
by generating economic growth or unleash further inflation or both is also
uncertain. Political uncertainty has increased and there seems no end in sight
to the Ukraine conflict. These are not easy conditions for a portfolio manager
to navigate.
The Investment Manager's Review provides an overview of how our portfolio
companies might be expected to respond to the continuing economic
uncertainties and why we believe they are high quality companies with robust
business models which will continue to demonstrate resilience during periods
of challenging market conditions.
The Board is pleased that our portfolio manager and his team remain focused on
the things they can control and remain resolute in maintaining their
investment approach. The strategy of identifying and owning high quality
companies that are capable of sustainable growth and that can compound in
value over many years, has been shown to work well over the long term through
different economic conditions.
The Board continues to have confidence that the Company's Investment Manager
can execute the strategy successfully, and the Board believes that as the
Company offers investors exposure to some of the best companies available in
the small and mid-cap sector, the long term investor will be well rewarded.
Diana Dyer Bartlett
Chairman
27 February 2023
1 These are APMs Definitions of these and other APMs used in the Annual
Report, together with how these measures have been calculated, are disclosed
in the Annual Report.
Investment Manager's Review
The Investment Manager's Review was first published as a letter to
shareholders on 30 January 2023 and is incorporated as published within the
Company's Strategic Report as it continues to be an accurate assessment of the
Company's investment performance during the year to 31 December 2022.
Dear Fellow Shareholder,
The performance of Smithson Investment Trust ('Smithson'), along with
comparators, is laid out below. In 2022 the Net Asset Value per share (NAV) of
the Company decreased by 28.1% and the share price declined by 35.2%. Over the
same period, the MSCI World Small and Mid Cap Index ('MSCI World SMID'), our
reference index, declined by 8.7%. We also provide the performance of
UK bonds and cash for comparison.
Total Return(5) Launch to 31 December 2022
1 January 2022
to 31 December 2022
%
Cumulative Annualised
% %
Smithson NAV(1) -28.1 +41.1 +8.5
Smithson Share Price -35.2 +30.8 +6.6
Small and Midcap Equities(2) -8.7 +34.9 +7.4
UK Bonds(3) -15.0 -9.9 -2.5
Cash(4) +1.4 +2.8 +0.6
(1) Source: Bloomberg, starting NAV 1000.
(2) MSCI World SMID Cap Index, £ Net source: www.msci.com.
(3) Bloomberg/Barclays Bond Indices UK Govt 5-10 yr, source: Bloomberg.
(4) Month £ Interest Rate source: Bloomberg.
(5) Alternative Performance Measure (see the Annual Report).
In the first paragraph of last year's letter we suggested that it would not be
possible to outperform every year and that there would be some periods of
underperformance. Despite knowing that no strategy, if followed with
discipline, can outperform in all periods, it is always unpleasant when a year
of underperformance arrives, and the extent of the poor performance this year
was particularly painful.
There was clearly one dominant factor at play contributing to this outcome,
and it impacted the portfolio consistently throughout the year: the rising
market expectation for interest rates.
As we now know, inflation started accelerating in 2021 and did not turn out to
be 'transitory' as several of those in charge of central banks believed it to
be at the time. In fact, it quickly became entrenched, and was exacerbated by
the war in Ukraine, which further propelled energy and food prices.
This caused a sharp volte-face by central banks, which began raising interest
rates in March 2022 by increasing increments until 75 basis point moves, a
major increase by historical standards, became the norm. The effect this had
on the market's expectations for future interest rates was profound. At the
beginning of 2022, bond markets were indicating that the upper bound of the
Fed's policy rate would be 1% by 2023. In December 2022, the Fed rate was
already 4.5% and market expectations were for a 2023 peak of over 5%.
While not at the 19% level it took to shock the US economy into submission in
1980, it is difficult to overstate the impact this move had on asset prices.
By which, of course, I am not just talking about stocks, bonds and crypto
currencies, where price movements are observed most immediately, but also real
estate, art, classic cars and anything else that was a recipient of the
world's recent savings glut. We always restrict ourselves to a maximum of one
quote from Warren Buffett per letter and it is probably best used here, to
cement the importance of the relationship in our minds: "Interest rates are to
asset prices like gravity is to the apple".
The reason for this is because the value of any asset, companies included, is
the total of the future cash flows you can expect to receive, discounted back
to today's monetary value using the prevailing interest rate. As rates rise,
today's value of the future cash flows decreases, and thus the value of the
asset declines.
While this increase in interest rate expectations affected the whole stock
market, unfortunately the shares owned in the portfolio were affected more
than most. This is because our high quality companies are growing faster than
the market average and generating more cash flows in the future. In practical
terms, their faster growth meant the valuations of our companies at the end of
2021 were higher than the average in the market, and therefore fell further
than the market as rate expectations moved.
Another way of explaining the relative underperformance is by looking at the
sector performance of the MSCI World Small and Midcap Index alongside the
sector weightings of the portfolio.
Twelve months to 31 December 2022 Sector Performance
Sectors MSCI W SMID (%) SMITHSON WEIGHT (%)
Energy +64% -
Utilities +12% -
Consumer Staples 0% 4%
Financials -2% 3%
Materials -3% -
Industrials -8% 23%
Health Care -15% 15%
Real Estate -16% -
Consumer Discretionary -18% 13%
Information Technology -20% 38%
Communication Services -23% 3%
It becomes immediately apparent that the worst performing sectors of the index
were also those to which Smithson is most exposed and, just as unfortunately,
the positively performing sectors were commodity driven and therefore contain
companies which we will never own.
Other factors weighing on share prices are the potential effects of cost
inflation, and a likely recession brought about by the tightening of monetary
policy. In fact, it was expected by the International Monetary Fund at the end
of 2022 that a third of the global economy could enter recession over the next
12 months, although more recent commentary has indicated a reduction in this
threat.
While recession holds some trepidation for us, the quality of the companies
held in the portfolio, including their lower level of cyclicality and
generally strong balance sheets, should enable them to weather the storm
better than other companies in the market.
However, they will still be susceptible to share price falls should the
recession turn out to be worse than currently expected by market participants.
It is perhaps worth stating again that we are not particularly concerned about
the effects of inflation on our portfolio companies, especially compared to
other companies in our reference index. The reason for this is that our
companies tend to have high gross margins and low capital requirements, which
mean that they are less susceptible to cost increases than other companies.
They are also in strong competitive positions, which typically allows them to
increase prices to offset higher costs, should they choose to do so.
So what next? While we would like to say that all the poor performance is
behind us, there is no guaranteed way to tell what is ahead. The best we can
do is to follow the advice of veteran bond investor Howard Marks by attempting
to understand where we are at this given moment. We observe market
expectations for future interest rates to move back to historical averages,
regional inflation rates decelerating, commodity prices declining, supply
chain bottlenecks easing and employment growth moderating helping to temper
wage inflation.
We also observe signs of significant bearishness in the market. The December
2022 Bank of America Fund Manager Survey indicated that more fund managers are
now overweight bonds (a sign of seeking safety) than at any time since 2009.
Another interesting gauge is to observe the reaction of the stock market to
major news events and data releases. Typically, there are both positive and
negative elements to most news items, for example, a strong employment number
means the economy is likely to keep growing, but on the flipside, central
banks might also keep raising interest rates. The market reaction will
indicate overall investor sentiment, and it feels to us that for most of the
year, the stock market was reacting negatively to such news.
We therefore suspect that we are potentially close to the end of stock market
declines for reasons of inflation and interest rates, although possibly not
yet through the worst in terms of recessionary fears, given these have yet to
be realised (or disproved). This last point might be helped in the near future
by the recent reopening of China from Covid restrictions, which, given the
sheer size of its manufacturing sector and consumer demand, will provide a
noticeable boost for the global economy. To illustrate the powerful effects
that both the Federal Reserve and the Chinese economy have on global stock
markets, we can borrow from investor Michael Howell, who said, "the stock
market's price-earnings multiple is determined in Washington and its earnings
Beijing".
Unfortunately, not all of the underperformance against the market was
inflicted upon us by macroeconomic factors; we made some mistakes too.
Principal among these was not selling certain companies which were overvalued
at the end of 2021. These included Domino's Pizza Enterprises and Fortinet,
two positions that we reduced in size due to our concerns over valuation, but
on reflection, could have trimmed more aggressively or perhaps even exited. We
remain holders as the falling share prices quickly returned the valuations to
more comfortable levels.
There is some good news. Save for a couple of positions, we are very confident
in the fundamentals of the businesses held in the portfolio. While a recession
may continue to hold back cash flow growth for a while, none of these
companies will suffer meaningfully, and certainly not to a degree which would
keep us awake at night.
As the below list of largest detractors of performance shows, there are a
couple of exceptions to this; companies whose poor share price performance was
exacerbated by deteriorating fundamentals.
Country Contribution %
Fevertree Drinks United Kingdom -3.2%
Temenos Switzerland -2.6%
Nemetschek Germany -2.1%
Rightmove United Kingdom -1.7%
Domino's Pizza Group United Kingdom -1.3%
Fevertree suffered very strong cost inflation in logistics (until recently
much of their product was shipped around the world from bottling plants in the
UK and Europe) and packaging including glass and tin, compressing the gross
margin from over 50% in 2019 to under 40% by the end of the year. This decline
in margin has taken place because management decided not to put up prices, as
they wanted to maintain the strong sales momentum that they are enjoying in
large markets such as the US. We remain holders for now as we believe that
over time the company can improve the margin, with our confidence boosted by
the likelihood that margins in more mature markets such as the UK, which are
not disclosed separately, are still very favourable. If this is combined with
continued growth in revenue, the potential for future cash generation is
substantial.
Temenos has been going through a transition from selling its banking software
as a perpetual licence, to selling it as a subscription or a service,
otherwise known as 'SaaS'. This should make little difference to the business
structure over the long term, although some argue it could be a positive due
to higher potential revenue from individual customers over time, but in the
interim it causes a decline in profits and cash flow as the high up-front
payments for licences are substituted for smaller annual or monthly
subscription payments. On top of this, there appears to have been a slowdown
in the number of new contract signings for the company, as its bank clients
are hesitating to spend more on their IT systems ahead of a potential
recession. Having spent some time with the CEO and Chairman to understand what
was going on behind the scenes, we were growing concerned that these issues
weren't being managed as well as they could be, and so were not upset by the
recent announcement of the CEO stepping down and a previous CEO taking over in
the interim.
Nemetschek is a company selling design software to the construction and media
industries and suffered from a combination of a high valuation owing to its
fast growth, and market concerns regarding a future recession in the
construction industry.
Rightmove, the UK online property portal, fell due to concerns over the UK
housing market in an environment of rising mortgage rates, a cost of living
crises and a potential recession. It is worth remembering that Rightmove's
revenue, being generated by subscriptions from estate agents, has no direct
link to house prices or sales volumes, and has actually continued to increase.
However, should some estate agents go out of business, which tends to happen
when the housing market declines, then they will lose subscribers and
Rightmove's sales will fall. The positive to this is that a new estate agent
only needs a laptop, phone and contact list, which means that the number of
estate agents tends to rebound quickly after any market correction.
Domino's Pizza Group declined due to market worries about a UK recession,
although we are a little more sanguine. While a reduction in disposable income
will put some sales at risk, we believe that those in the food industry most
likely to suffer are casual dining outlets, while 'better value' takeaway
options might prove more insulated from such pressure as people continue to
treat themselves to 'affordable luxuries' when times are tough. We also
suspect the men's football World Cup will have provided a tailwind to sales
into the end of the year.
Top five contributors to performance are shown below.
Country Contribution %
Rollins United States 0.4%
Technology One Australia 0.2%
Moncler Italy 0.2%
IDEX United States 0.1%
Qualys United States -0.1%
It may come as a surprise that there were some companies in our quality growth
portfolio that rose during the year.
Rollins, a US pest control company, was the best performer. This is a business
with highly repeatable earnings given that in some parts of the US where it
operates it is necessary to have frequent visits from pest control to keep
buildings habitable. This leads to much of its revenue being paid on
subscription and thus fairly dependable, which is almost certainly why the
shares performed well in a period of concerns regarding inflation and
recession.
TechnologyOne is perhaps the most surprising performance contributor, given
that it is a fast growing software company. However, the shares reacted well
as sales and earnings continued growing strongly throughout the year, more
than offsetting the downward pressure on market valuations. The institutions
it sells to include governments, universities and the military, which are yet
to be affected by the macroeconomic environment.
While Moncler's share price declined during the year, we were fortunate to
acquire the position at a relatively low point, which meant that it was a
positive contributor to the fund by the end of the period. This was also the
case for IDEX.
Qualys, the US cyber security company, did better than average as its revenue
growth continued accelerating throughout the year. While we do expect a
recession to weigh on companies' information technology budgets, and therefore
cyber security sales, it should still be more robust than other categories
given the constant and increasing threat of cyber crime.
As ever, we continue to follow the same simple strategy:
· Buy good companies
· Don't overpay
· Do nothing
To demonstrate that we do indeed buy good companies, we include the table
below, which is the weighted average operating metrics of our owned companies
over the last 12 months compared to the reference Index.
LTM Figures Smithson MSCI WSMID
Investment Trust
ROCE 43%(#) 11%
Gross Margin 65% 34%
Operating Profit Margin 25% 9%
Cash Conversion 101% 66%
Interest Cover 34x 7x
Data for the MSCI World SMID Cap Index is shown ex-financials, with weightings
as at 31.12.2022.
Data for MSCI World SMID Cap Index is on a weighted average basis, using last
available reported financial year figures as at 31.12.22.
Data for Smithson is on a weighted average basis, ex-cash, using last
available reported financial year figures as at 31.12.22.
Interest cover (EBIT ÷ net interest) data for Smithson and MSCI World SMID
Cap Index is done on a median average basis.
# ROCE for Smithson includes Rightmove (206% ROIC) and Verisign (330% ROIC).
Excluding Rightmove, the ROIC is 38%; excluding Verisign it is 30%; and
excluding both, it is 23%.
The table shows that our portfolio companies remain superior to those in the
Index on every metric, with return on capital employed, gross margin and
operating margin being of significant importance in the current environment
and particularly in excess of that observed for the Index.
The next step, of not overpaying for these companies, can be assessed by
looking at the average free cash flow yield (the free cash flow divided by the
market capitalisation) of the portfolio. Valuations are now more attractive
than they were a year ago. The free cash flow yield of the portfolio is 3.3%,
having been at 2.0% at the start of 2022. By coincidence, the current level is
roughly where the portfolio was trading when we launched the Trust at the end
of 2018, although it is worth bearing in mind that this figure includes Sabre
and Ambu, two companies which did not produce any free cash flow in 2022, but
did in 2018. They also contributed to the fact that the free cash flow
generated by the portfolio was actually 7% lower than in 2021. Much of this
was also due to companies in the portfolio spending more cash on re-building
their inventories from a low point in 2021 as supply chains eased, but at
higher component prices, due to inflation. This dynamic is confirmed by
looking at the average growth of earnings per share, which excludes working
capital expenses, and which was +7% in the period. It is perhaps worth
mentioning that if recession starts to bite in 2023, we may have to wait some
time for these figures to improve meaningfully. But we are confident that they
will.
Regarding the final step, do nothing, it must be noted that as share prices
were volatile throughout the year, trading activity increased significantly as
we set out to take advantage of buying new positions or increasing existing
ones at lower valuations. This meant that discretionary portfolio turnover,
excluding any buybacks and the investment of proceeds from new shares issued,
was 42.8% compared to just 9.5% in 2021. While this sounds like a high level,
it is worth noting that according to Morningstar, the average turnover for
actively managed equity funds tends to be above 60% and in 2020, the last year
of such volatile markets, it was 86%.
Costs of dealing, including taxes, amounted to 0.03% (3 basis points) of NAV
in the period, slightly higher than the 0.02% incurred in 2021. This may seem
odd given there was much more discretionary turnover this year, but the reason
is that the overall turnover of the fund, including the investment of the
proceeds from share issuance, which was very limited in 2022, was not that
much higher than last year. The Ongoing Charges Figure(1) was 0.9% of NAV
compared to 1.0% in 2021. This includes the Management Fee of 0.9%, applied to
the market capitalisation of the Trust, which was lower than the NAV for most
of the year. Combined, this means the Total Cost of Investment in the Trust
was 0.93%.(1)
Part of the turnover was generated by buying three companies during the year
after the decline in share prices resulted in attractive valuations. Moncler,
the Italian clothing company which designs and produces high-end branded
apparel, traces its roots back to 1952 and the invention of down-filled
mountaineering coats, but fell on hard times in the 1990s before being
rejuvenated in the 2000s. It now produces luxury items across several
categories in clothing and accessories. The company has until recently been
expanding by opening new Moncler branded stores, but this growth has been
boosted by acquiring the Stone Island brand in 2020. Stone Island is another
Italian luxury clothing company which has a similar profile to Moncler's in
2000, which is why management believe they can greatly improve and grow the
Stone Island brand, much as they have done over the last 20 years with
Moncler.
Since the inception of the fund, we have experienced success in owning
decentralised industrial conglomerates such as Halma and Diploma. While the
organic growth of these businesses is acceptable, around the mid-single digit
percent level, it is the consistent, disciplined acquisition of high quality
'bolt-on' companies that allow the groups to create substantial shareholder
value over time. In fact, we believe that in an era of higher interest rates
and lower asset prices, companies such as these, making frequent small
acquisitions - without significant additional debt - should stand to
benefit greatly. We acquired Addtech as it is another high quality example of
this type of company, with a very small head office directing the allocation
of the cash flow that is generated by its independently managed businesses.
Addtech, based in Sweden, has 140 subsidiaries and 3,000 employees grouped
into five industrial business areas including Industrial Process, Energy,
Automation, Components and Power Solutions. Its origins date back to 1906 and
it has had the same business concept for over 100 years. We can therefore be
confident in its strategy over the next decade at least.
Finally, we bought a position in IDEX, an industrial company based in the US.
IDEX is another decentralised industrial conglomerate which grows through
small acquisitions, but this time in areas such as pumps, meters and systems
for high-value materials, high-precision instrumentation for health and
science industries, and tools, valves and controls for the fire and rescue
industry and other applications, including clamping devices used on the Mars
rover.
We also sold three companies in the period. The first was a US-based boiler
and heater manufacturer, AO Smith. While the company has a very attractive US
business operating in a tight oligopoly, its future growth opportunities lie
in areas with much more aggressive competition, such as water heaters in China
and water purification in the US. For this reason, we became less optimistic
on its ability to sustain profitable growth and sold, fortunately before fears
of recession caused a significant decline in its share price.
The second company we sold was Wingstop. After the shares troughed in the
summer, the share price more than doubled into the autumn, at which point they
were trading at levels we no longer felt comfortable with given the decline in
cash flow the company was experiencing post its pandemic boost. In addition,
we were concerned about the long-term CEO deciding to leave for 'another
challenge', a potential capital intensive investment into chicken farming and
an increasingly levered balance sheet.
Towards the end of the year, we also sold Ansys, a US company producing
simulation software. While we still appreciate the dominant position it
occupies in its software niche, maintained by the most advanced and accurate
physics simulation engines, we have growing concerns about its frequent
acquisition of companies that are clearly producing little or no profit. In
the three years prior to our original investment in 2018, the company spent
$29m per year on acquisitions on average. In the three years since our
investment, the company has spent an average of $623m per year. As a result,
invested capital has increased 112% since 2018 while operating profit is up
only 12%, depressing return on capital employed to below 10%. This indicates
to us that the cost to sustain its competitive position is perhaps greater
than it first appeared.
The result of this activity is shown below, with a breakdown of the portfolio
in terms of sector and geography at the end of the period. The median year of
foundation of the companies in the portfolio at the year end was 1973.
Sector 31 December 2022 31 December 2021
(%) (%)
Information Technology 38% 44%
Industrials 23% 22%
Healthcare 15% 11%
Consumer Discretionary 13% 9%
Consumer Staples 4% 5%
Communication Services 3% 5%
Financials 3% 3%
Cash - Uninvested 1% 1%
Source: Fundsmith
Information Technology now has a lower weighting, mostly due to the sale of
Ansys. As we say every year, while the Information Technology weighting
appears large, we do not think of ourselves as running a 'tech fund', because
this is an MSCI defined sector which includes a number of diverse businesses
and end markets. To illustrate this more clearly, we list below the companies
that fall into the sector definition, along with a more detailed business
description and country of listing.
Country of Listing Business Description
Cognex United States Logistics Electrical Equipment
Fortinet United States Cyber Security
Halma United Kingdom Safety and Environmental Electrical Equipment
IPG Photonics United States High Powered Lasers
Nemetschek Germany Software - Construction and Media
Paycom Software United States Software - Human Resources
Qualys United States Cyber Security
Sabre United States Travel and Leisure
Simcorp Denmark Software - Asset Management
Technology One Australia Software - Government Institutions
Temenos Switzerland Software - Banks
Verisign United States Internet Domain Management
Hopefully from this list it is possible to see that the companies have a
diverse range of end markets, and even the collection of software companies
provide software products to very different industries. This serves to
highlight the fact that we would not expect the revenue trends of these
companies to move in lock step through economic cycles, as perhaps the single
sector weighting might suggest.
While the size of the Industrials weight was little changed, Health Care
increased due to adding to existing positions, while Consumer Discretionary
increased from the addition of Moncler to the portfolio.
Country of Listing 31 December 2022 31 December 2021
(%) (%)
USA 40% 47%
UK 17% 21%
Italy 10% 4%
Denmark 8% 5%
Australia 7% 7%
Switzerland 6% 7%
Germany 6% 6%
New Zealand 3% 2%
Sweden 2% -
Cash 1% 1%
Source: Fundsmith
The USA is the largest country by weighting but has decreased by 7 percentage
points from the end of last year due to all three of the companies sold from
the portfolio being listed in the country. After a decline in the UK weighting
and an increase in Italy (again, due to Moncler), the European weighting now
appears more balanced than it has done historically.
The geographical weighting that we pay most attention to though, is the
economic exposure of our companies, measured by the origin of revenue. This
year, Europe increased slightly to become the largest, with a decrease in US
exposure now making North America number two on the list. The other entries
are broadly unchanged from last year. While Smithson only invests in developed
markets, some of those companies generate revenue in emerging markets, shown
by the EMEA and Latin America lines below.
Source of Revenue 31 December 2022 31 December 2021
(%) (%)
Europe 39% 38%
North America 36% 38%
Asia Pacific 19% 19%
Eurasia, Middle East, Africa 4% 3%
Latin America 2% 2%
Given the importance of Environmental, Social and Governance (ESG) issues in
investing, we outlined our ESG approach in last year's report. Instead of
repeating what was written there, it might be more interesting for you to read
about some of our engagements with portfolio companies regarding ESG issues
during the course of the year. One of the most challenging situations
experienced by our companies this year was when Russia invaded Ukraine. IPG
Photonics was particularly affected because a third of their employees were
based in Russia, producing much of the semi-finished goods being shipped to
other countries for final assembly. We were, of course, greatly concerned by
this and approached the company to discuss the matter. We were reassured by
the fact that the management team had swiftly determined and begun executing a
plan that would transfer all manufacturing out of Russia within 12 months. We
have since been tracking the progress of this plan and are pleased to report
that they have made significant headway.
Another situation which immediately attracted our focus was the announcement
that the recently hired CEO of Domino's Pizza Group was leaving to re-join his
previous employer, Whitbread, to become CEO of that company. Our first call
was to the Chairman of Domino's Pizza Group to express our frustration at this
outcome. What had driven him away - colleagues or company culture? Undue
pressures from the Supervisory Board? We were also eager to understand whether
the remuneration structure was motivating enough to keep the right person in
the job.
Once you find the managerial talent that you believe will create value for
shareholders, you want to be able to compensate them to a level and in a
method that keeps them in that role and working as effectively as possible to
increase the value of the company. Through several further interactions with
the company, including meetings with the CEO, Financial Director and Investor
Relations executive, we came to the conclusion that neither the culture, Board
or incentive structure had pushed out the CEO, but he was simply driven by his
desire to manage a larger company, one where he had already spent several
years of his career, and already knew many of the people that he would now be
leading. There is therefore a simple one-word explanation for the departure -
ego - which probably means that we need not worry about the company itself.
The search for a new CEO is ongoing and we will remain shareholders in the
interim.
Finally, we would like to once again thank all shareholders for their support
of Smithson Investment Trust. We acknowledge that this is by far the worst
period of ownership for most and as such will not have been easy or
comfortable. Perhaps a simple analogy for what we are currently experiencing
is to imagine the relationship between our performance and the market as like
a car being towed by an erratic driver. There may be brief periods of smooth
acceleration, but for the rest of the time you will be subjected to periods of
drift when the rope goes slack, before being jolted forwards again when the
car reaches the end of the tether. The current period is clearly one of the
car drifting backwards, but to end up at the final destination of superior
long-term returns, it makes sense to still be in the car when the rope snaps
back.
While we hope that market conditions are more favourable in 2023, we continue
undiscouraged with our strategy of buying high quality, growing companies.
Although style drift - the act of becoming less disciplined in the execution
of your original strategy in an attempt to make money in all periods - may
sound attractive after a year like 2022, it's only a short while before your
North Star becomes so clouded by opportunism that you end up far away from a
cohesive strategy and no longer know what type of investments you are looking
for. Be assured, this will never happen at Smithson. As Mike Tyson famously
said, "Everyone has a plan 'till they get punched in the mouth", but while we
took plenty of punches this year, the plan has survived. We will continue to
strive to allocate your capital as effectively as possible using the same
long-term strategy, whatever the environment.
Simon Barnard
Fundsmith LLP
Investment Manager
27 February 2023
(1) These are APMs Definitions of these and other APMs used in the Annual
Report, together with how these measures have been calculated, are disclosed
in the Annual Report.
Investment Portfolio
Investments held as at 31 December 2022
Security Country of Fair value %
incorporation
£'000
of investments
Moncler Italy 136,953 5.7
Recordati Italy 112,061 4.7
Sabre USA 110,275 4.6
Verisign USA 109,101 4.6
Simcorp Denmark 102,126 4.3
Ambu Denmark 100,536 4.2
Fortinet USA 88,998 3.7
Masimo USA 88,998 3.7
Domino's Pizza Enterprises Australia 86,970 3.6
Fevertree Drinks UK 86,966 3.6
Top 10 Investments 1,022,984 42.7
Domino's Pizza Group UK 81,076 3.4
Rightmove UK 79,113 3.3
Geberit Switzerland 78,880 3.3
MSCI USA 77,423 3.2
Cognex USA 76,311 3.2
Equifax USA 75,777 3.2
Diploma UK 74,341 3.1
Nemetschek Germany 73,883 3.1
Verisk Analytics USA 73,539 3.1
Technology One Australia 70,703 3.0
Top 20 Investments 1,784,030 74.6
Temenos Switzerland 70,194 2.9
Fisher & Paykel Healthcare New Zealand 68,459 2.9
Rational Germany 64,203 2.7
IPG Photonics USA 63,626 2.7
Qualys USA 58,113 2.4
Addtech Sweden 51,686 2.2
Spirax-Sarco Engineering UK 51,381 2.1
Rollins USA 49,631 2.1
IDEX USA 47,396 2.0
Halma UK 45,817 1.9
Paycom Software USA 39,312 1.5
Total Investments 2,393,848 100.0
Investment Objective, Policy and Investment Methodology
Investment Objective
The Company's investment objective is to provide shareholders with long term
growth in value through exposure to a diversified portfolio of shares issued
by listed or traded companies.
Investment Policy
The Company's investment policy is to invest in shares issued by small and
mid-sized listed or traded companies globally with a market capitalisation (at
the time of initial investment) of between £500 million and £15 billion.
The Company's approach is to be a long-term investor in its chosen shares. It
will not adopt short-term trading strategies. Accordingly, it will pursue its
investment policy by investing in approximately 25 to 40 companies as follows:
(a) the Company can invest up to 10 per cent. in value of its gross
assets (as at the time of investment) in shares issued by any single body;
(b) not more than 20 per cent. in value of its gross assets (as at the
time of investment) can be in deposits held with a single body. This limit
will apply to all uninvested cash (except cash representing distributable
income or credited to a distribution account that the depositary holds);
(c) not more than 20 per cent. in value of its gross assets (as at the
time of investment) can consist of shares issued by the same group. When
applying the limit set out in (a) this provision would allow the Company to
invest up to 10 per cent. in the shares of two group member companies (as at
the time of investment);
(d) the Company's holdings in any combination of shares or deposits
issued by a single body must not exceed 20 per cent. in value of its gross
assets (as at the time of investment);
(e) the Company must not acquire shares issued by a body corporate and
carrying rights to vote at a general meeting of that body corporate if the
Company has the power to influence significantly the conduct of business of
that body corporate (or would be able to do so after the acquisition of the
shares). The Company is to be taken to have power to influence significantly
if it exercises or controls the exercise of 20 per cent. or more of the voting
rights of that body corporate; and
(f) the Company must not acquire shares which do not carry a right to
vote on any matter at a general meeting of the body corporate that issued them
and represent more than 10 per cent. of the shares issued by that body
corporate.
The Company may also invest cash held for working capital purposes and
awaiting investment in cash deposits and money market funds.
For the purposes of the investment policy, certificates representing certain
shares (for example, depositary interests) will be deemed to be shares.
Hedging Policy
The Company will not use portfolio management techniques such as interest rate
hedging and credit default swaps.
The Company will not use derivatives for purposes of currency hedging or for
any other purpose.
Borrowing Policy
The Company has the power to borrow using short-term banking facilities to
raise funds for short-term liquidity purposes or for discount management
purposes including the purchase of its own shares, provided that the maximum
gearing represented by such borrowings shall be limited to 15 per cent. of the
net asset value at the time of drawdown of such borrowings. The Company may
not otherwise employ leverage.
Not attempting market timing
The Investment Manager will not attempt to manage the percentage invested in
equities in the Company's portfolio to reflect any view of market levels,
timing or developments. The Investment Manager's unwillingness to make
investment decisions on the basis of market timing is one factor that will
prevent the Company from investing in sectors that are highly cyclical.
Investment Methodology and Management Process
The Investment Manager seeks to apply the investment methodology and
management process summarised below (to the extent appropriate given the
nature of a relevant investment opportunity):
Seeking high-quality businesses with specific characteristics and intangible
assets
In the Investment Manager's view, a high-quality business is one which can
sustain a high return on operating capital employed and which generates
substantial cash flow, as opposed to only creating accounting earnings. If it
also reinvests some of this cash back into the business at its high returns on
capital, the Investment Manager believes the cash flow will then compound over
time, along with the value of the Company's investment.
The Investment Manager will not just look for a current high rate of return,
but will seek a sustainable high rate of return. Fundamentally, such companies
need to demonstrate the ability to continue competing against all other
companies which are trying to take a share of their profits. This can come in
many forms, but the Investment Manager will look for companies that rely on
intangible assets such as one or more of the following: brand names; patents;
customer relationships; distribution networks; installed bases of equipment or
software which provide a captive market for services, spares and upgrades; or
dominant market shares.
The Investment Manager will generally seek to avoid companies that rely on
tangible assets such as buildings or manufacturing plants, as it believes
well-financed competitors can easily replicate and compete with such
businesses. In many instances, such competitors are able to become better than
the original simply by installing the latest technology in their new factory.
Banks are quite keen to lend against the collateral of tangible assets, and
such companies tend to be more heavily leveraged as a result. The Investment
Manager believes that intangible assets are much more difficult for
competitors to replicate, and companies reliant on intangible assets require
more equity and are less reliant on debt as banks are less willing to lend
against such assets.
The Investment Manager believes such companies will resist the rule of mean
reversion that states returns will revert to the average over time as new
capital is attracted to business activities which earn above average returns.
They can do this because their most important assets are intangible and
difficult for a competitor to replicate. Since stock markets typically value
companies on the assumption that their returns will regress to the mean,
businesses whose returns do not do so can become undervalued. This presents an
opportunity for the Company.
The Investment Manager will seek businesses which have growth potential. The
Investment Manager views growth potential as the ability of a company to be
able to reinvest at least a portion of its excess cash flow back into the
business to grow, whilst generating a high return on the cash thus reinvested.
Over time, this should compound their shareholders' wealth by generating more
than a pound of stock-market value for each pound reinvested.
The Investment Manager is interested in growth that is driven through either
increases in volume or increases in price and will prefer a mixture of both.
The ability to increase product prices above the rate of inflation is the most
profitable way to grow and demonstrates that the company has a healthy
competitive position selling products or services which are strongly desired
by their customers. However, growth through price alone can build a shelter
under which competitors can flourish, eventually resulting in cheaper
competition gaining significant market share. On the other hand, growth
through additional unit volumes almost always requires more cost, in both
manufacturing capacity and materials used to produce the products, as well as
transportation to get them to customers. Increasing scale in this way will
eventually make a company's market position more difficult to compete against,
however, unlike growing through price alone, with the further benefit that
volume growth can sometimes continue indefinitely.
The Company will only invest in companies that earn a high return on their
capital on an unleveraged basis and do not require borrowed money to function.
The Investment Manager will avoid sectors such as banks and real estate which
require significant levels of debt in order to generate a reasonable
shareholder return given their returns on unlevered equity investment are low.
While the Investment Manager favours companies that are able and willing to
spend cash on the research and development of their products to create
important intangible assets such as patents and manufacturing efficiency, it
will avoid industries that innovate very quickly and are subject to rapid
technological change. Innovation is often sought by investors, but does not
always produce lasting value for them and can have high capital costs.
Avoiding overpaying for shares
The Company will only invest in shares where the Investment Manager believes
the valuation is attractive. The Investment Manager will estimate the free
cash flow of every company after tax and interest, but before dividends and
other distributions, and after adding back any discretionary capital
expenditure which is not needed to maintain the business. The Investment
Manager aims to invest only when free cash flow per share as a percentage of a
company's share price (the "free cash flow yield") reflects value relative to
long-term interest rates and when compared with the free cash flow yields of
other investment candidates both within and outside the Company's portfolio.
The Investment Manager will buy securities that it believes will grow and
compound in value, which bonds cannot, at yields that are similar to or better
than the Company would get from a bond.
Buying and holding
The Company will seek to be a long-term, buy-and-hold investor. The Investment
Manager believes this will facilitate the compounding of the Company's
investments over time as the investee companies continue to reinvest their
cash flows. The Investment Manager, however, will continually test its
original views against new information it may discover while regularly
reviewing the news and results concerning the investee companies. The
resulting low level of dealing activity also minimises the frictional costs of
trading, a cost which is often overlooked by investors as it is not normally
disclosed as part of the costs of running funds.
Business Review
The Strategic Report has been prepared in accordance with the Companies Act
2006 (Strategic Report and Directors' Report) Regulations 2013 to provide
information to shareholders to assess how the Directors have performed their
duty to promote the success of the Company.
The Strategic Report contains certain forward-looking statements. These
statements are made by the Directors in good faith based on the information
available to them up to the time of their approval of this report and such
statements should be treated with caution due to the inherent uncertainties,
including both economic and business risk factors, underlying any such
forward-looking information.
Purpose, Strategy and Business Model
The Company is registered in England and Wales and is an externally managed
investment trust; its shares are premium listed on the Official List and
traded on the main market of the London Stock Exchange. It was established by
its Investment Manager, Fundsmith LLP and listed on 19 October 2018.
The purpose of the Company is to provide a vehicle for investors to gain
exposure to a portfolio of small and mid-sized listed or traded companies
globally, through a single investment.
The Company's strategy is to create value for shareholders by addressing its
investment objective. Please see the Annual Report for the investment
objective and approach.
The Company is an alternative investment fund ("AIF") under the alternative
investment fund managers' directive ("AIFMD") and has appointed Fundsmith LLP
as its alternative investment fund manager ("AIFM").
As an externally managed investment trust the Company has delegated its
operational activities to specialised third party service providers who are
overseen by the Board of non-executive Directors. Details regarding the
Company's key third party service providers are included in the Management
Engagement Committee Report. The Company has no executive directors, employees
or internal operations.
Key Performance Indicators ("KPI")
The Company's Board of Directors meets regularly and reviews performance
against a number of key measures, as follows:
· Net asset value total return against the MSCI World SMID
Cap Index measured on a net sterling adjusted basis;
· Share price total return;
· Premium/discount of share price to net asset value per
share; and
· Ongoing charges ratio.
The KPI measures are Alternative Performance Measures ("APMs"). Please refer
to the APM section and Glossary for definitions of these terms and an
explanation of how they are calculated.
Net asset value total return against the benchmark
The Directors regard the Company's net asset value total return as being the
overall measure of value delivered to shareholders over the long term. The
Investment Manager's investment style is such that performance is likely to
deviate from that of the benchmark index.
The Company's net asset value per share at 31 December 2022 was 1,410.7p and
it reported a total loss after tax for the year of £967.7 million (2021:
£503.7 million profit), comprising a capital loss of £972.0 million (2021:
£512.1 million profit) and a revenue profit of £4.4 million (2021: revenue
loss of £8.4 million) (see financial statements section). The net asset value
total return for the year to 31 December 2022 was -28.1%(1) and the annualised
net asset return for the period from listing on 19 October 2018 to 31 December
2022 was 8.5%(1). The Board considers the MSCI World SMID Cap Index measured
on a net, sterling-adjusted basis, to be the most appropriate comparator to
the Company's performance. The returns generated by the MSCI World SMID Cap
Index over the same periods were -8.7% and +7.4% respectively, thus the
Company underperformed the benchmark by 19.4 percentage points for the year
ended 31 December 2022 but has outperformed the Index by 1.1 percentage
points, annualised for the period from the Company's listing to the year end.
A full description of performance during the period under review is contained
in the Investment Manager's Review.
Share price total return
The Directors also regard the Company's share price total return to be a key
indicator of performance.
The share price total return for the year to 31 December 2022 was -35.2%(1)
and the annualised share price total return for the period from listing on 19
October 2018 to 31 December 2022 was +6.6%(1), underperforming the MSCI World
SMID Cap Index reference benchmark by 26.5 percentage points and 0.8
percentage points respectively. The Company's share price moved from a premium
to net asset value at the start of the year to a discount to net asset value.
Further detail is given in the following section.
Premium/discount of share price to net asset value per share
The Board undertakes a regular review of the level of premium/discount and the
average discount to net asset value for the year to 31 December 2022 was 6.1%.
From 1 January until late February 2022, the Company's shares had consistently
traded at a premium to the net asset value, before predominantly trading at a
discount to net asset value for the remainder of the year. The Board seeks to
manage the premium/discount and generate value for shareholders through the
issue of shares at a premium to net asset value or repurchase of shares at a
discount to net asset value. To this end, during the period the Company's
shares traded at a premium to net asset value, the Company issued 5.4 million
new ordinary shares at an average premium to the prevailing net asset value of
2.6%, raising net proceeds of £92.5 million. During the period the Company's
shares traded at a discount to the net asset value, the Company repurchased
5.7 million ordinary shares at an average discount to the prevailing net asset
value of 8.7%, for a cost of £74.0 million (see Statement of Changes in
Equity). Together, the share issues and repurchases generated a benefit to net
asset value per share of approximately £7.4 million net of costs. The
decision and timing of any share issuance and/or buy-back is at the discretion
of the Board.
As at 31 December 2022, the discount of the Company's share price to the net
asset value per share was 7.3%(1).
The Directors intend to seek renewal at each Annual General Meeting of their
authority to allot shares or to buy back shares with a view to managing the
premium/discount as well as creating further shareholder value. Shares will
only be issued at a premium to net asset value and bought back at a discount
to net asset value.
If, after the end of the fourth financial year of the Company's existence
(being 31 December 2022) or any subsequent year, the Company's shares have
traded, on average, at a discount in excess of 10 per cent. of net asset
value per share in any such year, the Directors will consider proposing a
special resolution at the Company's next Annual General Meeting that the
Company ceases to continue in its present form. If such a vote is proposed and
passed, the Board will be required to formulate proposals to be put to
shareholders within four months to wind up or otherwise reconstruct the
Company, having regard to the liquidity of the Company's underlying assets.
Any such proposals may incorporate arrangements which enable investors who
wish to continue to be exposed to the Company's investment portfolio to
maintain some or all of their existing exposure.
Ongoing charges ratio
The Directors monitor the Company's expenditure at each board meeting and
review the ongoing charges ratio disclosed in the Interim and Annual Reports.
The Directors regard the ongoing charges ratio as a measure of the regular
recurring costs of running an investment company. Expressed as a percentage of
average net asset value, the annualised ongoing charges ratio for the year was
0.9% (2021: 1.0%)(1). The primary contribution to this fall in the Company's
ongoing charges ratio was that the Investment Manager's fees were based upon
the Company's market capitalisation which fell by a greater degree than the
Company's net asset value. The Board seeks to manage and where possible to
improve the ongoing charges ratio and to this end the Management Engagement
Committee regularly reviews its service provider fee rates.
1 These are APMs. Definitions of these and other APMs used in the Annual
Report, together with how these measures have been calculated, are disclosed
in the Annual Report.
Risk Management
Risk Management
The Board is responsible for the ongoing identification, evaluation and
management of emerging and principal risks faced by the Company and the Board
has established a process for the regular review of these risks and their
mitigation. This process accords with the UK Corporate Governance Code, the
FRC Guidance on Risk Management, Internal Control and Related Financial and
Business Reporting and the AIC Code of Corporate Governance and a description
follows below.
· The Board maintains and regularly reviews a matrix of risks
faced by the Company and controls in place to mitigate those risks. The impact
and probability of those risks occurring after controls are performed are
charted on a risk heat map and reviewed by the Board along with a risk
appetite statement that reflects the Board's relative level of risk tolerance
and establishes key triggers necessitating Board management. An annual formal
review of the risk procedures and controls in place at the Investment Manager
and other key service providers is performed. Emerging risks are actively
discussed as part of this process and this should ensure that emerging (as
well as known) risks are adequately identified and, so far as practicable,
mitigated.
The market and economic impacts of the war in Ukraine and the secondary
impacts from the COVID pandemic continue to be monitored by the Board. The
Investment manager and other key service providers gave updates throughout the
year on operational resilience and portfolio exposure and impact from the
Ukraine conflict.
· Each Director brings external knowledge of the investment
company sector (and financial services generally), trends, threats as well as
strategic insight;
· The Investment Manager advises the Board at quarterly Board
meetings on industry trends, providing insight on future challenges in the
markets in which the Company operates/ invests. The Company's broker regularly
reports to the Board on markets, the investment company sector and the
Company's peer group;
· The Board receives quarterly reports from the Investment
Manager's Compliance officer and the Depositary on any matters of regulatory
concern and developments;
· The company secretary briefs the Board on forthcoming
legislation/regulatory change that might impact on the Company. The auditor
also provides updates which are relevant to the Company; and
· The Company is a member of the AIC, which provides regular
technical updates as well as drawing members' attention to forthcoming
industry/regulatory issues and advising on compliance obligations.
Principal Risks
The Directors have carried out a robust assessment of the principal risks
facing the Company, including those that would threaten its business model,
future performance, solvency and liquidity.
1. Investment objective and policy risks
The Company may not achieve its investment objective.
The Company is dependent upon the Investment Manager's successful
implementation of the Company's investment policy and ultimately on its
ability to create an investment portfolio capable of generating attractive
returns.
The Company is not constrained on weightings in any sector or geography. This
may lead to the Company having significant exposure to portfolio companies
from certain business sectors or based in certain geographies. Greater
concentrations of investments in any one sector or geography may lead to
greater volatility in the Company's investments and may adversely affect
performance. This may be exacerbated by the small number of investments held
at any time.
Mitigation
The Investment Manager has a proven and extensive track record, and the Board
undertakes a review of the performance of the Company and its transactions at
each quarterly Board meeting. The Investment Manager spreads the investment
risk over a portfolio of investments in accordance with the Company's
investment policy, and at the year end the Company held investments in
31 companies with details of the geographic and sector weightings given in
the Investment Manager's Review.
2. Market risks
Price movements and stock market conditions may have a negative impact on the
Company's portfolio and its ability to identify and execute suitable
investments that might generate acceptable returns. Market conditions may also
restrict the supply of suitable investments at a price the Investment Manager
considers may generate acceptable returns.
If conditions (such as those experienced as a consequence of the COVID-19
pandemic or the current conflict in Ukraine) affecting the investment market
negatively impact the price at which the Company is able to buy or dispose of
its assets, this may have a material adverse effect on the Company's business
and results of operations.
Interest rate movements may affect the level of income receivable on cash
deposits and the interest payable both by the Company and by investee
companies on their borrowings. In addition, where the Company invests in high
growth investee companies, any increase in interest rates may compress the
growth of such companies and therefore affect their valuations. As such,
interest rate fluctuations may reduce the Company's returns.
The Company's ordinary shares are denominated in pounds sterling while the
majority of the Company's investments are denominated in a currency other than
pounds sterling. The Company does not hedge its currency exposures and changes
in exchange rates may lead to depreciation in the Company's net asset value.
Mitigation
The Company's investment policy and the fact that it will not use hedging
instruments to mitigate interest rate or foreign currency risk is clearly
explained in the Owner's Manual (which can be found on the Company's website
at www.smithson.co.uk). The Investment Manager has a proven and extensive
track record and reports regularly to the Board on market developments. The
Investment Manager's policy is to hold investments for the long term and not
look at market timing issues.
Further details on Market and Financial Instrument risk are disclosed in note
15 to the financial statements.
3. Outsourcing risks
The Company has outsourced all its operations to third party service
providers. Failure by any service provider to carry out its obligations in
accordance with the terms of its appointment could result in negative
implications for the Company. Such failures could include cyber breaches or
other IT failures, fraud (including unauthorised payments by the
administrator), poor record keeping and loss of assets and failure to collect
all the Company's dividend income. Cyber incidents are becoming increasingly
common and may cause disruption and impact business operations, potentially
resulting in financial losses, theft, interference with the ability to
calculate the Net Asset Value or additional operating costs. If the Investment
Manager fails to identify risks or liabilities associated with investee
companies adequately, this could give rise to an investee company not fitting
the Company's investment policy or unexpected losses and adverse performance.
The rapid spread of infectious disease such as the COVID-19 pandemic, and
measures introduced to combat its spread, could cause disruption to the
operations of the Company and its key service providers.
Mitigation
The Company has appointed experienced service providers, each of whom has a
service agreement, and the performance of the key service providers is
reviewed annually by the Management Engagement Committee. Cyber risk
management questions were incorporated in this review to confirm the existence
and application of cyber security controls and procedures. The Company's key
service providers report periodically to the Board on their business
continuity plans and procedures. The Board monitors the adequacy of controls
in place at the key service providers and their planned response to an
extended period of disruption, to ensure that the impact to the Company is
limited. Each key service provider was asked to present reports on their
actions and responses, all of which were entirely satisfactory, and there was
no noticeable change in any of the key services provided.
The procedures of the AIFM, depositary and custodian are reviewed and tested
by their external auditors and such reports on the service providers control
environment are made available to clients. These reports are also reviewed by
the Management Engagement Committee and where any control failures are
identified, the key service provider is required to explain and provide
assurance to the Company on any impact or potential risk to the Company and
its mitigation.
4. Key individuals risk
Fundsmith LLP is responsible for managing the Company's investments. The
Investment Manager relies on key individuals to identify and select investment
opportunities and to manage the day-to-day affairs of the Company. There can
be no assurance as to the continued service of these key individuals at the
Investment Manager, and the departure of any of these from the Investment
Manager without adequate replacement may have a material adverse effect on the
Company's business prospects and results of operations.
Mitigation
The Investment Manager has a remuneration policy in place seeking to
incentivise key individuals to take a long-term view. Additionally, the
Company's key individuals are significantly invested in the Company (see note
17 to the financial statements), therefore their interests and the Company's
shareholders are more aligned. Finally, the Investment Manager has plans in
place to ensure continuity in the event of the departure of key individuals.
5. Regulatory risks
The Company benefits from the current exemption for investment trusts from UK
tax on chargeable gains. Any change to HMRC's rules or the taxation of
investee companies could affect the Company's ability to provide returns to
shareholders.
Mitigation
The Investment Manager and the company secretary monitor proposed changes to
tax rules and report to the Board thereon.
Viability Statement
Viability Statement
In accordance with the UK Corporate Governance Code and the Listing Rules, the
Directors have assessed the prospects of the Company over a longer period than
the 12 months required by the "Going Concern" provision. The Company's
investment policy is to buy good companies, not overpay and then do nothing.
The Smithson Owner's Manual, a copy of which can be found on the Company's
website at www.smithson.co.uk states "We will only invest in the equity of
companies which we believe can compound in value over many years, if not
decades, where we can remain a happy owner, safe in the knowledge that in 5 to
10 years' time our investment is likely to be worth significantly more than
what we paid for it". When selecting or reviewing investments, the Investment
Manager evaluates the prospects and risks which could affect investee
companies over at least a 5 to 10 year period with a view to them being good
long-term investments capable of generating the Company's required returns.
The Board therefore believes that 10 years is the most appropriate time
horizon to adopt for the Viability Statement.
In reviewing the Company's viability, the Board considered the Company's
business model, the principal risks and uncertainties, including the economic
and market conditions, higher inflation and interest rates arising from the
continuing war in Ukraine, and its present and expected financial position.
The Company is a closed-end fund which invests in listed or traded global
securities which are inherently liquid. It does not intend to borrow (except
in short term circumstances to manage a discount) nor will it use derivatives
in any hedging operation. It receives dividend income from its investment
portfolio with which it settles its operating expenses. Any shortfall in
income available to settle expenses could be met by the Company's cash
balances or by realising investments. The Board receives regular reports from
the Investment Manager to confirm the average time to liquidate any investment
position. At 31 December 2022 the Company had net assets of £2,418 million of
which £2,394 million was held in listed investments and £24 million in cash
(see Statement of Financial Position). At 31 December 2022, 91.5% of the
Company's portfolio could be liquidated within 30 days. The Board therefore
has substantial options to manage the Company's ongoing solvency.
The Board will consider putting a continuation vote to shareholders if in any
year the Company's share price trades at an average discount of 10% or more to
net asset value. During 2022, the average discount to NAV was 6.1%, the first
period of a sustained discount since the launch of the Trust. The Board seeks
to address the level of discount through the use of share buybacks and the
Company intends to continue with its current programme of regular market
purchases whilst the shares trade at a material discount to net asset value.
The Company benefits from certain tax benefits relating to its status as an
investment trust. Any change to such taxation arrangements would inevitably
affect the attractiveness of an investment in the Company and consequently its
viability as an effective investment vehicle. At the time of consideration, no
such changes in taxation arrangements are planned.
The Directors have assumed that:
· the Board will not change the Company's investment
objective of providing shareholders with long-term growth in value;
· the premium/discount management programme described above
will continue to operate in such a way, that the Board will not elect to put a
continuation vote to shareholders;
· the performance of the Company will continue to be
satisfactory such that the shareholders will want the Company to continue in
existence; and
· the Board will continue to manage the Company's business to
ensure it retains its status as an investment trust.
Based on the results of this review, the Directors have formed a reasonable
expectation that the Company will continue in its operations and meet its
expenses and liabilities as they fall due over the next 10 years.
Non-Financial Information
Section 172 of Companies Act 2006 Statement
The Board sets the Company's strategy and objectives, taking into account the
interests of all its stakeholders. It is ultimately responsible for the
direction, management, performance and long-term sustainable success of the
Company. A good understanding of the Company's stakeholders enables the Board
to consider the potential impact of strategic decisions on each stakeholder
group during the decision-making process. By considering the Company's
purpose, vision and values, together with its strategic priorities, the Board
aims for its decisions to be fair and take account of the interests of the key
stakeholder groups, together with the impact of its operations on the
environment.
During the period under review, the Board believes that it has acted in good
faith and discharged its duty per section 172 of the Companies Act 2006
("s172"), to promote the success of the Company for the benefit of its members
as a whole and having regard to the interests of stakeholders and the factors
set out in s172. The Board performed its role as outlined in the schedule of
matters reserved for the Board and taking into account the interests of the
key stakeholders.
Company Culture and Values
Culture
The culture of the Company is set by the Board and is based on the values of
the Company summarised below. The Board seeks to apply these values in all its
dealings with its stakeholders and encourages the same values to be adopted by
its key service providers.
Values
High Standards
The Directors want to ensure the success of the Company and generate long term
value for its shareholders. To this end the Board will seek to adopt high
standards of corporate governance and encourage best practice in all its
activities. This approach extends to the Company's dealings with its
stakeholders including shareholders, the Investment Manager and other service
providers.
Honesty and Integrity
The Board seeks to comply with all relevant laws and regulations which apply
to investment companies and has zero tolerance to bribery and corruption or
any other fraudulent behaviour. The Board further expects the same standards
to be applied by its service providers. As part of its service provider annual
review, the Board seeks assurance of high standards from its service providers
in relation to their policies with regard to governance including
whistleblowing, tax evasion, human rights, modern slavery and bribery.
Transparency and accountability
The Board encourages clarity and transparency in its Board discussions and in
communications with its stakeholders. The Board seeks to work with all service
providers in a collaborative manner while at the same time recognising that
the Board's role involves exercising oversight and challenge. The Board
further recognises that it is accountable to shareholders and will endeavour
to give a fair, balanced and understandable overview of the Company's
performance to this end.
Company Sustainability and Stakeholders
As part of its work to evaluate its principal risks, the Board identified its
key stakeholders, as applicable for the investment company, which can be
summarised as follows:
· Investors;
· Investment Manager;
· Other key service providers; and
· Investee companies.
Examples below provide an overview of how the Board considered the factors set
out in s172, including how its engagement with the Company's key stakeholders
helps the Board in its decision-making.
Stakeholder Management
To understand the views of the Company's key stakeholders, the Board aims to
ensure there is a regular and sustained engagement, which is to be taken into
consideration in its decision-making and discussions.
Investors
Communications are key to establishing a meaningful relationship with our
shareholders. The Company publishes monthly fact sheets and reports on its
financial performance at the half year and year end, all of which are
available on the Company's website. An Owners' Manual can be downloaded from
the website which provides an understanding of the Investment Manager's goals
and how they are to be achieved.
The Company raised £822 million in its initial public offering ("IPO") in
October 2018, which was the largest amount that had been raised by any
investment trust Initial Public Offering ('IPO') on the London Stock Exchange
to that date.
From inception until April 2022 the Company continuously issued new shares at
a premium to NAV (net of all costs). The Company's shares began the year
trading at a 3% premium to NAV but in late February the shares began trading
at a discount, ending the year at a discount of (7.3)%(1). The average
discount across the year was (6.1)%, the first period of a sustained discount
since the launch of the Trust. In response to the emergence of the discount,
the Board, in consultation with its advisers and the investment manager, has
sought to address the situation through the use of share buybacks. The Company
started to buy back shares at the end of April, and by the end of December
2022 had acquired 3.2% of the total shares in issue. A further 0.6% has since
been bought back and at 22 February 2023, the discount was 8.6%. The Company
intends to continue with its current programme of regular market purchases
whilst the shares trade at a material discount. As a matter of law, the
Company is only permitted to fund purchases of its own shares out of its
distributable reserves or the proceeds of a fresh issue of shares. To ensure
that a lack of distributable reserves does not prevent the Board in the future
from continuing share buybacks when they feel they are appropriate, the Board
at a General Meeting held 6 February 2023, obtained the approval of
shareholder to apply to the High Court to reduce the Company's share premium
by £500 million. The reduction, if approved by the High Court, will result in
a corresponding increase in the Company's distributable reserves to facilitate
future buybacks. All shares purchased are held in treasury and will only be
reissued at a premium, net of all costs. An application has been made to the
High Court to sanction the capital reduction.
The Board is seeking to renew its authorities to issue and buyback shares at
the Company's AGM (for further details, please see the Annual Report) with a
view to managing the premium/discount and to continue to create value for
shareholders. The Board is mindful that there should be an active, liquid
market in the Company's shares. As a closed-ended fund listed on the Premium
segment of the main market, shareholders should always be able to exit through
the stock market. The Board recognises the importance of shareholders being
able to sell at a price not disadvantageous to them and the premium/discount
to net asset value at which the Company's shares trade is monitored at all
times.
The Board encourages communications with its Investment Manager and key
service providers to be open and transparent, with all parties working
together in a collaborative manner at the same time as the Board exercising
oversight and challenge (further information can be found in the Business
Review section, describing the Key Performance Indicators). The Board believes
that effective risk management contributes to the safeguarding of shareholder
value and successful operation of the Company and therefore assesses and
manages, where possible or appropriate, the risks faced by the Company.
During the year the Board took the decision to increase the size of the Board
to four non-executive Directors, with Denise Hadgill being appointed effective
1 June 2022. This decision was taken as part of the Board's succession
planning and to broaden the experience and diversity of the Board for the
benefit of the Company and its shareholders as a whole.
The Company and Investment Manager are seeking to promote an investor base
that is interested in a long-term holding in the Company. The Board, through
the Company's broker and the Investment Manager, maintains regular contact
with shareholders and welcomed shareholders in May 2022 to the first in person
AGM since the IPO and the lifting of COVID-19 restrictions. It is the
intention that the full Board will attend the forthcoming AGM and the Chairman
will chair the meeting. Shareholders have the opportunity to attend the AGM
where they can question the Board and representatives of the Investment
Manager. The Chairs of the Board's committees will also normally attend the
AGM, to engage with shareholders on significant matters related to their areas
of responsibility.
The Directors welcome the views of all shareholders and place considerable
importance on maintaining open dialogue with them. Shareholders wishing to
contact the Chairman, or any other member of the Board, may do so at any time
by writing to the company secretary. Alternatively, the Chairman can be
emailed at the following address: smithsonchairman@fundsmith.co.uk.
Directors take into account the proxy voting agencies guidelines to assess the
voting recommendations published to shareholders ahead of AGM. This is a
helpful tool to understand the investors' views on certain resolutions.
Shareholder feedback is discussed in Board meetings with the broker and
Investment Manager, whether received directly to the Board or through the
Investment Manager and broker's shareholder meetings and the Board is pleased
that the feedback received remained positive throughout the period. The Board
also received a number of questions on the Company's performance and strategy
ahead of and during a question and answer session at the AGM which were either
addressed in the manager's presentation or responded to directly. The
Company's shareholder engagement strategy and details of shareholder
communications can be found in the Annual report.
In addition to this, the Investment Manager engages with shareholders at
regular webinars, where questions are received and answered. The majority of
the questions are around the fundamentals of the investee companies and
whether they continue to be congruent with the Company's investment
philosophy. In all cases it is noted that this is the case, with specific
attention paid towards regular meetings with the investees' executive
management and ensuring that investment criteria are being met in all areas.
Investment Manager
As explained above, the Company's business model is such that it has no
employees and relies on services provided by third party service providers to
manage the Company's operations. The Investment Manager is the most
significant service provider of the Company, and a description of its role can
be found in the Report of the Directors in the Annual Report.
The Board receives regular reports from the Investment Manager, discusses the
portfolio at each Board meeting as well as maintaining a constructive dialogue
between meetings. Additionally, the Board held a strategy session in November
2022 at which the Board and Investment Manager discussed in detail the
performance of the Company's portfolio of investments and the investible
universe for the Company. The Board and Investment Manager along with the
broker also discussed at the strategy session the investment trust market and
the Company's position within it, the Company's portfolio structure as well as
ESG considerations (including diversity) and shareholder engagement
strategies. A representative of the Investment Manager also attends each
quarterly Board meeting and most ad hoc meetings.
The Investment Manager's remuneration is based on the market capitalisation of
the Company which aligns the manager's interests with those of shareholders.
Furthermore, partners and employees of the Investment Manager are
significantly invested in the Company as disclosed in note 17 of the financial
statements; further aligning the Investment Manager's interests with those of
the shareholders. The Investment Manager paid costs of £5.1 million in
respect of the Company's IPO and the Placing Programme prospectus issued in
2020. This means that shareholders' investment was not discounted by the cost
of the IPO and that the Company only gains from its ordinary share issues, as
prospectus costs were met. This is unusual for investment trusts and is a
testament to the relationship which the Company enjoys with its Investment
Manager.
The Management Engagement Committee reviews the performance of the Investment
Manager, its remuneration and the discharge of its contractual obligations at
least annually. Further detail on the Committee's activities and
recommendations can be found in the Management Engagement Committee Report in
the Annual Report.
Other key service providers
In ensuring the smooth operation of the Company, the Board also monitors the
performance of other key service providers such as the fund administrator,
depositary and custodian (please see the Management Engagement Committee
Report) and maintains regular contact through direct reports at Board meetings
or through the company secretary to ensure there is open dialogue and good
relationship management at the Board level. Additionally, in view of the
operational challenges and restrictions caused by the COVID-19 pandemic, the
Board continues to receive regular updates and assurance on the operational
effectiveness of its key service providers, taking this feedback into
consideration when assessing the Company's risks. The Board was pleased to
note its service providers continued to operate effectively.
In maintaining the Company's reputation and high standards of business
conduct, the Board is provided with regular reports from the Company's broker
and company secretary who alert the Board to recent and proposed changes in
regulation and market practice, as well as any likely reputational threats
which, in turn, influence the Board's decision-making process. The Company's
corporate values, established to manage its business relationship with its
stakeholders, are stated above and the Company's approach on anti-bribery and
prevention of tax evasion can be found below and on the Company's website at
www.smithson.co.uk. The Board also seeks assurance of high standards from its
service providers as regards governance including whistleblowing, tax evasion,
and bribery as part of its service provider annual review. The Board also
periodically reviews the market rates for services provided, to ensure that
the Company continues to receive high quality service at a competitive cost.
Investee companies
As an investment trust with no trading activity and an outsourced business
model, the Company has no direct social, community or environment
responsibilities. However, the Company does have such responsibilities through
its investment portfolio. The Company is a long-term investor (please see
Owner's Manual at the Company's website at www.smithson.co.uk) and the
Investment Manager's Review sets out how the Investment Manager considers ESG
matters and explains and summarises their approach and engagement with
investee companies. Fundsmith are signatories of the United Nations Principles
for Responsible Investment and their ESG approach is overseen by the Fundsmith
Stewardship and Sustainability Committee, on which the Company's manager,
Simon Barnard, sits. The Board is satisfied that the Investment Manager is
actively managing ESG risks and is diligent in its stewardship
responsibilities.
The Company recognises the increased interest in reporting on ESG matters and
supports the Association of Investment Companies ("AIC") initiative to provide
information on investment companies' ESG practices in a centralised database
and accordingly has submitted its own commentary in that regard and
shareholders can access the statement on the Company's information page of the
AIC website (www.theaic.co.uk) and on the Company's website at
www.smithson.co.uk.
ESG initiatives of the investee companies are included in the Investment
Manager's Review.
Dividend Policy
The Company's intention is to look for overall return rather than seeking any
particular level of dividend. The Company will comply with the investment
trust rules regarding distributable income which states that 85% of recognised
income be distributed to shareholders.
Any dividends and distributions will be at the discretion of the Board.
Subject to the Companies Act, the Company may, by ordinary resolution, declare
a final dividend to be paid to members of the Company according to their
rights and interests in the profits of the Company available for distribution,
but no dividend shall be declared in excess of the amount recommended by the
Board. The Company does not intend to pay any interim dividends.
Were the Company to be in a position to pay a dividend, then it may, subject
to complying with all relevant criteria and with the approval of the
shareholders by ordinary resolution, choose to offer shareholders a scrip
dividend alternative or may establish a scrip dividend scheme that would allow
shareholders to receive ordinary shares instead of a cash dividend.
Environmental Matters
As mentioned earlier, the Company is an investment company. As such, it does
not have any physical assets, property, employees or operations of its own.
The Company does not provide goods or services in the normal course of its
business and nor does it have customers. In consequence, the Company has no
greenhouse gas emissions to report from its operations. As the Company has no
material operations and therefore has little to no energy use, it falls below
40,000kWh of energy use and is therefore exempt from the disclosures under the
Companies (Directors' Report) and Limited Liability Partnership (Energy and
Carbon Report) Regulations 2018 or Streamlined Energy and Carbon Reporting
criteria. The Investment Manager evaluates environmental matters concerning
investee companies as summarised in the Investment Manager's Review.
Due to an outsourced business model, the Company has no direct environmental
responsibilities, but it does have such through its investment portfolio.
ESG Integration
The Company aims to be a long-term, buy-and-hold investor, building a
portfolio of high-quality companies that will generate superior, risk-adjusted
returns over the long term. As a long-term investor, developing a detailed
understanding of the business, its industry, and the variety of risks and
opportunities that may influence the performance of the companies we invest in
is essential. Assessment of the risks associated with the business
environmental and social performance, as well as the quality of corporate
governance, known as ESG factors, is a fully integrated component of our
pre-investment research; poor ESG performance can generate significant,
negative impacts on the financial performance of the company as well as
increase its risk profile, particularly over the long term. The Company builds
an investable universe of, as we define them, "good companies". Good companies
are those that can generate a sustainable high return on invested capital over
the full business cycle and have the ability to reinvest these returns to
generate consistent growth.
Please see ESG Integration document and Owner's Manual at the Company's
website at www.smithson.co.uk and the Investment Manager's Review to read more
on how the Investment Manager considers environmental matters.
Exercise of Voting Powers and Stewardship Code
The Company and the Investment Manager support the UK Stewardship Code issued
by the Financial Reporting Council. Voting on investee company shareholder
resolutions is undertaken by the Investment Manager. A copy of Fundsmith's
Responsible Investment Policy and a report on its voting at investee
shareholder meetings in 2021 and the first half of 2022 can be found on the
Investment Manager's website at www.fundsmith.co.uk. During the year to 31
December 2022, 403 votes were cast by the Investment Manager of which 97.8%
were voted in favour of the resolution and 2.2% against. Of the 403 votes
cast, 47 related to management remuneration and the Investment Manager voted
against the company management on 17% of these.
Modern Slavery Disclosure
Due to the nature of the Company's business, being a company that does not
offer goods or services to customers, the Board considers there are no
relevant disclosures with regard to the Modern Slavery Act 2015 in relation to
the Company's own operations. The Board considers the Company's supply chains,
dealing predominately with professional advisers and service providers in the
financial services industry, to be low risk in this regard.
Anti-bribery and Corruption
The Company takes a zero-tolerance approach to bribery and corruption and is
committed to acting professionally, fairly and with integrity in all its
business dealings and relationships wherever it operates. The Company's policy
and the procedures that implement it are designed to support that commitment.
A summary of the Company's anti-bribery and corruption policy can be found on
the Company's website at www.smithson.co.uk.
Prevention of the Facilitation of Tax Evasion
In response to the Criminal Finances Act 2017, the Board has adopted a
zero-tolerance approach to the criminal facilitation of tax evasion. A summary
of the Company's policy can be found on the Company's website at
www.smithson.co.uk.
Employees, Human Rights and Community Issues
The Board recognises the requirement to provide information about employees,
human rights and community issues. As the Company has no employees, all its
Directors are non-executive and all its functions are outsourced, there are no
disclosures to be made in respect of employees, human rights and community
issues. As at the date of this report the Company had four Directors, of whom
two are male and two are female. The Board's policy on diversity is contained
in the Corporate Governance Report of the Annual Report.
Conclusion
The Board is mindful of the directors' duties as described by s172 in
considering the interests of stakeholders when deliberating all important
decisions. Work of the Board and its Committees is described in the Governance
Report in the Annual Report.
Strategic Report
The Strategic Report set out in the Annual Report was approved by the Board of
Directors on the 27 February 2023.
On behalf of the Board
Diana Dyer Bartlett
Chairman
27 February 2023
1 These are APMs Definitions of these and other APMs used in the Annual
Report, together with how these measures have been calculated, are disclosed
in the Annual Report.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with international accounting standards in
conformity with the requirements of the Companies Act 2006 and International
Financial Reporting Standards (IFRSs) as issued by the International
Accounting Standards Board (IASB). Under company law the Directors must not
approve the financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Company and of the profit or
loss of the Company for that year. In preparing these financial statements,
International Accounting Standard 1 require that the Directors have:
· selected suitable accounting policies and then applied them
consistently;
· made judgements and accounting estimates that are
reasonable and prudent;
· presented information, including accounting policies, in a
manner that provides relevant, reliable, comparable and understandable
information;
· provided additional disclosures when compliance with the
specific requirements in IFRS were insufficient to enable users to understand
the impact of particular transactions, other events and conditions on the
Company's financial position and financial performance; and
· prepared the financial statements on a going concern basis.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The financial statements are published on the Company's website at
www.smithson.co.uk. The Investment Manager has delegated authority for the
maintenance and integrity of the website on behalf of the Company. The work
carried out by the auditor does not involve consideration of the maintenance
and integrity of the website and, accordingly, the auditor accepts no
responsibility for any changes that have occurred to the financial statements
since they were initially presented on the website. Visitors to the website
need to be aware that legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
The Directors consider that the Annual Report, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy.
Each of the Directors confirm that, to the best of their knowledge:
· the financial statements, which have been prepared in
accordance with applicable accounting standards, give a true and fair view of
the assets, liabilities, financial position and net return of the Company for
the year ended 31 December 2022; and
· the Strategic Report includes a fair review of the
development and performance of the business and the position of the Company,
together with a description of the principal risks and uncertainties that it
faces.
On behalf of the Board
Diana Dyer Bartlett
Chairman
27 February 2023
Financial Statements
Independent Auditor's Report
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of Smithson Investment Trust plc (the
'company'):
· give a true and fair view of the state of the company's
affairs as at 31 December 2022 and of its loss for the year then ended;
· have been properly prepared in accordance with United
Kingdom adopted international accounting standards and International Financial
Reporting Standards (IFRSs) as issued by the International Accounting
Standards Board (IASB); and
· have been prepared in accordance with the requirements of
the Companies Act 2006.
We have audited the financial statements which comprise:
· the statement of comprehensive income;
· the statement of financial position;
· the statement of changes in equity;
· the statement of cash flows; and
· the related notes 1 to 18.
The financial reporting framework that has been applied in their preparation
is applicable law, United Kingdom adopted international accounting standards
and IFRSs as issued by the IASB.
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities under those
standards are further described in the auditor's responsibilities for the
audit of the financial statements section of our report.
We are independent of the company in accordance with the ethical requirements
that are relevant to our audit of the financial statements in the UK,
including the Financial Reporting Council's (the 'FRC's') Ethical Standard as
applied to listed public interest entities, and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We confirm
that we have not provided any non-audit services prohibited by the FRC's
Ethical Standard to the company.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters The key audit matter that we identified in the current year was:
● Valuation and ownership of investments
Within this report, key audit matters are identified as follows:
● Newly identified
● Increased level of risk
● Similar level of risk
● Decreased level of risk
Materiality The materiality that we used in the current year was £24.2m which was
determined on the basis of 1% of net assets as at 31 December 2022.
Scoping Audit work to respond to the risks of material misstatement are performed
directly by the audit engagement team.
Significant changes in our approach There were no significant changes in our approach in the current year.
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors'
use of the going concern basis of accounting in the preparation of the
financial statements is appropriate.
Our evaluation of the directors' assessment of the company's ability to
continue to adopt the going concern basis of accounting included:
· Assessing the controls in place to evaluate the ability of
the company to continue to operate as an Investment Trust;
· Challenging the underlying data and key assumptions used to
make the assessment, and evaluating their plans for future actions in relation
to their going concern assessment;
· Assessing the projected period of time to liquidate the
portfolio and expense cover for the subsequent 12 month period from the date
of signing the financial statements (from February 2023) for reasonableness;
· Assessing any other market altering factors such as
inflation, high energy costs and rising interest rates by looking at the
operational impact and business continuity plans; and
· Assessing the appropriateness of the going concern
disclosures in the financial statements relating to going concern.
Based on the work we have performed, we have not identified any material
uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the company's ability to continue
as a going concern for a period of at least twelve months from when the
financial statements are authorised for issue.
In relation to the reporting on how the company has applied the UK Corporate
Governance Code, we have nothing material to add or draw attention to in
relation to the directors' statement in the financial statements about whether
the directors considered it appropriate to adopt the going concern basis of
accounting.
Our responsibilities and the responsibilities of the directors with respect to
going concern are described in the relevant sections of this report.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were
of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified. These matters
included those which had the greatest effect on: the overall audit strategy,
the allocation of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
5.1. Valuation and ownership of Investments
Key audit matter description As an investment entity, the Company holds investments of £2,394m as at 31
December 2022 (2021: £3,339m) which have decreased by 28% from the prior
year. These represent the most quantitatively significant financial statement
line on the statement of financial position.
There is a risk that investments may not be valued correctly or may not
represent the property of the company. This may result in a material
misstatement within the investments held at fair value through profit or loss
and we consider that there is a potential area for fraud.
Refer to note 1f to the financial statements for the accounting policy on
investments and details of the investments are disclosed in note 9 to the
financial statements. The valuation and ownership of investments is included
in the Audit Committee report as a significant reporting matter in the Annual
Report.
How the scope of our audit responded to the key audit matter We performed the following procedures to address the valuation and ownership
of investment key audit matter:
● We obtained an understanding and tested relevant controls over
valuation and ownership of investments.
● We independently valued 100% of the investment portfolio to
the closing bid prices published by an independent pricing source.
● We confirmed the ownership of 100% of investments at the
year-end date by obtaining independent third-party confirmations directly from
the depositary.
In addition, we performed the following procedures to address whether the
investment portfolio was actively traded and designated with the correct fair
value hierarchy:
● We assessed the post year-end volume of trade date in order to
identify investments that are not actively traded.
● We tested the completeness and accuracy of disclosures in
relation to fair value measurements and liquidity risk.
Key observations Based on the work performed we concluded that the valuation and ownership of
investments is appropriate.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial
statements that makes it probable that the economic decisions of a reasonably
knowledgeable person would be changed or influenced. We use materiality both
in planning the scope of our audit work and in evaluating the results of our
work.
Based on our professional judgement, we determined materiality for the
financial statements as a whole as follows:
Materiality £24.2m (2021: £33.6m)
Basis for determining materiality 1% (2021: 1%) of net assets
Rationale for the benchmark applied Net assets has been chosen as a benchmark as it is the most relevant benchmark
for investors and is a key driver of shareholder value. The decrease in
materiality year on year arose principally from the decrease in the company's
net assets.
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the
probability that, in aggregate, uncorrected and undetected misstatements
exceed the materiality for the financial statements as a whole. Performance
materiality was set at 70% of materiality for the 2022 audit (2021: 65%). In
determining performance materiality, we considered the following factors:
a. no significant changes in business structure and operations;
b. our experience from previous audits has indicated a low number of
corrected and uncorrected misstatements identified in prior periods; and
c. no significant changes in the company's operating environment
caused by the uncertainty and volatility brought about by the inflation, high
energy costs and rising interest rates.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all
audit differences in excess of £1.2m (2021: £0.67m), as well as differences
below that threshold that, in our view, warranted reporting on qualitative
grounds. We also report to the Audit Committee on disclosure matters that we
identified when assessing the overall presentation of the financial
statements.
7. An overview of the scope of our audit
7.1. Scoping
Our audit was scoped by obtaining an understanding of the Company and its
environment, including internal control and assessing the risks of material
misstatement. Audit work to respond to the risks of material misstatement was
performed directly by the audit engagement team.
7.2. Our consideration of the control environment
We assessed the control environment including the use of service
organisations. We tested relevant controls in respect to the valuation and
ownership of investments and adopted a control reliance strategy. We performed
an understanding of relevant business process and relevant controls that
address the risk of material misstatement in financial reporting.
7.3. Our consideration of climate related risks
In planning our audit, we have considered the potential impact of climate
change on the Company's business and its financial statements. The Company
continues to develop its assessment of the potential impacts of environmental,
social and governance ("ESG") related risks, including climate change, as
outlined in the Annual Report. As a part of our audit, we held discussions to
understand the process of identifying climate-related risks, the determination
of mitigating actions and the impact on the Company's financial statements. We
performed our own qualitative risk assessment of the potential impact of
climate change on the Company's account balances and classes of transactions.
We have read the disclosures in relation to climate change made in the other
information within the annual report and ascertain whether the disclosures are
materially consistent with the financial statements and our knowledge from our
audit.
8. Other information
The other information comprises the information included in the annual report,
other than the financial statements and our auditor's report thereon. The
directors are responsible for the other information contained within the
annual report.
Our opinion on the financial statements does not cover the other information
and, except to the extent otherwise explicitly stated in our report, we do not
express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the course of the audit, or otherwise
appears to be materially misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether this gives rise to a
material misstatement in the financial statements themselves. If, based on the
work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of directors
As explained more fully in the directors' responsibilities statement, the
directors are responsible for the preparation of the financial statements and
for being satisfied that they give a true and fair view, and for such internal
control as the directors determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the company's ability to continue as a going concern, disclosing as
applicable, matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the company or
to cease operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
A further description of our responsibilities for the audit of the financial
statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor's report.
11. Extent to which the audit was considered capable of detecting
irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and
regulations. We design procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect of irregularities,
including fraud. The extent to which our procedures are capable of detecting
irregularities, including fraud is detailed below.
11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of
irregularities, including fraud and non-compliance with laws and regulations,
we considered the following:
· the nature of the industry and sector, control environment
and business performance including the design of the company's remuneration
policies, key drivers for directors' remuneration, bonus levels and
performance targets;
· results of our enquiries of management and the audit
committee about their own identification and assessment of the risks of
irregularities;
· any matters we identified having obtained and reviewed the
company's documentation of their policies and procedures relating to:
· identifying, evaluating and complying with laws and
regulations and whether they were aware of any instances of non-compliance;
· detecting and responding to the risks of fraud and
whether they have knowledge of any actual, suspected or alleged fraud;
· the internal controls established to mitigate risks of
fraud or non-compliance with laws and regulations;
· the matters discussed among the audit engagement team
regarding how and where fraud might occur in the financial statements
As a result of these procedures, we considered the opportunities and
incentives that may exist within the organisation for fraud and identified the
greatest potential for fraud in the valuation and ownership of investments. In
common with all audits under ISAs (UK), we are also required to perform
specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory framework that
the company operates in, focusing on provisions of those laws and regulations
that had a direct effect on the determination of material amounts and
disclosures in the financial statements. The key laws and regulations we
considered in this context included the UK Companies Act, Listing Rules and
tax legislation.
In addition, we considered provisions of other laws and regulations that do
not have a direct effect on the financial statements but compliance with which
may be fundamental to the company's ability to operate or to avoid a material
penalty.
11.2. Audit response to risks identified
As a result of performing the above, we identified the valuation and ownership
of investments as a key audit matter related to the potential risk of fraud.
The key audit matters section of our report explains the matter in more detail
and also describes the specific procedures we performed in response to the key
audit matter.
In addition to the above, our procedures to respond to risks identified
included the following:
· reviewing the financial statement disclosures and testing
to supporting documentation to assess compliance with provisions of relevant
laws and regulations described as having a direct effect on the financial
statements;
· enquiring of management and the audit committee concerning
actual and potential litigation and claims;
· performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material misstatement due
to fraud;
· reading minutes of meetings of those charged with
governance, reviewing internal audit reports and reviewing correspondence with
HMRC and the FCA; and
· in addressing the risk of fraud through management override
of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting
estimates are indicative of a potential bias; and evaluating the business
rationale of any significant transactions that are unusual or outside the
normal course of business.
We also communicated relevant identified laws and regulations and potential
fraud risks to all engagement team members, and remained alert to any
indications of fraud or non-compliance with laws and regulations throughout
the audit.
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors' remuneration report to be audited
has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
· the information given in the strategic report and the
directors' report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
· the strategic report and the directors' report have been
prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the company and its
environment obtained in the course of the audit, we have not identified any
material misstatements in the strategic report or the directors' report.
13. Corporate Governance Statement
The Listing Rules require us to review the directors' statement in relation to
going concern, longer-term viability and that part of the Corporate Governance
Statement relating to the company's compliance with the provisions of the UK
Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each
of the following elements of the Corporate Governance Statement is materially
consistent with the financial statements and our knowledge obtained during the
audit:
· the directors' statement with regards to the
appropriateness of adopting the going concern basis of accounting and any
material uncertainties identified set out in the Annual Report;
· the directors' explanation as to its assessment of the
company's prospects, the period this assessment covers and why the period is
appropriate set out in the Annual Report;
· the directors' statement on fair, balanced and
understandable set out in the Annual Report;
· the board's confirmation that it has carried out a robust
assessment of the emerging and principal risks set out in the Annual Report;
· the section of the annual report that describes the review
of effectiveness of risk management and internal control systems set out in
the Annual Report; and
· the section describing the work of the audit committee set
out in the Annual Report.
14. Matters on which we are required to report by exception
14.1. Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our
opinion:
· we have not received all the information and explanations
we require for our audit; or
· adequate accounting records have not been kept, or returns
adequate for our audit have not been received from branches not visited by us;
or
· the financial statements are not in agreement with the
accounting records and returns.
We have nothing to report in respect of these matters.
14.2. Directors' remuneration
Under the Companies Act 2006 we are also required to report if in our opinion
certain disclosures of directors' remuneration have not been made or the part
of the directors' remuneration report to be audited is not in agreement with
the accounting records and returns.
We have nothing to report in respect of these matters.
15. Other matters which we are required to address
15.1. Auditor tenure
Following the recommendation of the audit committee, we were appointed by the
Board on 24 July 2019 to audit the financial statements for the year ending 31
December 2019 and subsequent financial periods. The period of total
uninterrupted engagement including previous renewals and reappointments of the
firm is 4 years, covering the years ending 31 December 2019 to 31 December
2022.
15.2. Consistency of the audit report with the additional report to the audit
committee
Our audit opinion is consistent with the additional report to the audit
committee we are required to provide in accordance with ISAs (UK).
16. Use of our report
This report is made solely to the company's members, as a body, in accordance
with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been
undertaken so that we might state to the company's members those matters we
are required to state to them in an auditor's report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company's members as a
body, for our audit work, for this report, or for the opinions we have formed.
Chris Hunter CA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Edinburgh, United Kingdom
27 February 2023
Statement of Comprehensive Income
For the year ended For the year ended
31 December 2022
31 December 2021
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Income from investments held at fair value through profit or loss 2 31,341 - 31,341 21,638 - 21,638
(Losses)/gains on investments held at fair value through profit or loss 9 - (970,879) (970,879) - 513,312 513,312
Foreign exchange gains/(losses) 147 (399) (252) (25) (565) (590)
Investment management fees 4 (21,998) - (21,998) (25,884) - (25,884)
Other expenses and transaction costs 5 (1,463) (743) (2,206) (1,583) (639) (2,222)
(Loss)/profit before tax 8,027 (972,021) (963,994) (5,854) 512,108 506,254
Tax 6 (3,670) - (3,670) (2,540) - (2,540)
(Loss)/profit for the year 4,357 (972,021) (967,664) (8,394) 512,108 503,714
(Loss)/return per share (basic and diluted) (p) 7 2.49 (555.60) (553.11) (5.27) 321.50 316.23
The Company does not have any income or expenses which are not included in the
(loss)/return for the year.
All of the (loss)/return and total comprehensive income for the year is
attributable to the owners of the Company.
The "Total" column of this statement represents the Company's Income
Statement, prepared in accordance with International Financial Reporting
Standards (IFRS). The "Revenue" and "Capital" columns are supplementary to
this and are prepared under guidance published by the Association of
Investment Companies (AIC).
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.
Statement of Financial Position
As at As at
31 December 2022 31 December 2021
Notes £'000 £'000
Non-current assets
Investments held at fair value through profit or loss 9 2,393,848 3,339,150
Current assets
Receivables 10 3,853 1,203
Cash and cash equivalents 24,589 32,081
28,442 33,284
Total assets 2,422,290 3,372,434
Current liabilities
Trade and other payables 11 (4,323) (5,364)
Total assets less current liabilities 2,417,967 3,367,070
Equity attributable to equity shareholders
Share capital 12 1,771 1,717
Share premium 13 2,219,487 2,126,997
Capital reserve 203,358 1,249,362
Revenue reserve (6,649) (11,006)
Total equity 2,417,967 3,367,070
Net asset value per share (p) 14 1,410.7 1,961.0
The financial statements were approved by the Board on 27 February 2023 and
were signed on its behalf by:
Lord St John of Bletso
Director
The accompanying notes are an integral part of these financial statements.
Smithson Investment Trust plc - Company Registration Number 11517636
(Registered in England and Wales)
Statement of Changes in Equity
For the year ended 31 December 2022
Share Share Capital* Revenue*
Capital Premium Reserve Reserve Total
Notes £'000 £'000 £'000 £'000 £'000
Balance at 1 January 2022 1,717 2,126,997 1,249,362 (11,006) 3,367,070
Issue of new shares 54 93,050 - - 93,104
Costs on new share issues - (560) - - (560)
Ordinary shares bought back and held in treasury - - (73,604) - (73,604)
Costs on buybacks - - (379) - (379)
(Loss)/profit for the year - - (972,021) 4,357 (967,664)
Balance at 31 December 2022 12 1,771 2,219,487 203,358 (6,649) 2,417,967
For the year ended 31 December 2021
Share Share Capital* Revenue*
Capital Premium Reserve Reserve Total
Notes £'000 £'000 £'000 £'000 £'000
Balance at 1 January 2021 1,414 1,595,894 737,254 (2,612) 2,331,950
Issue of new shares 303 533,918 - - 534,221
Costs on new share issues - (2,815) - - (2,815)
Profit/(loss) for the year - - 512,108 (8,394) 503,714
Balance at 31 December 2021 12 1,717 2,126,997 1,249,362 (11,006) 3,367,070
* Distributable reserve.
The accompanying notes are an integral part of these financial statements.
Statement of Cash Flows
For the year to For the year to
31 December 2022 31 December 2021
Notes £'000 £'000
Operating activities
(Loss)/profit before tax (963,994) 506,254
Adjustments for:
Loss/(gain) on investments held at
fair value through profit or loss 9 970,879 (513,312)
Decrease in receivables 25 592
(Decrease)/increase in payables (1,175) 751
Overseas taxation paid 6 (4,584) (2,705)
Net cash used in operating activities 1,151 (8,420)
Investing activities
Purchases of investments 9,11 (651,473) (673,005)
Sale of investments 9 624,269 127,272
Net cash used in investing activities (27,204) (545,733)
Financing activities
Proceeds from issue of new shares 12 93,104 539,023
Issue costs relating to new shares 12 (560) (2,835)
Purchase of shares held in treasury 12 (73,604) -
Costs relating to buy backs 12 (379) -
Net cash generated from financing activities 18,561 536,188
Net decrease in cash and cash equivalents (7,492) (17,965)
Cash and cash equivalents at start of the year 32,081 50,046
Cash and cash equivalents at end of the year 15 24,589 32,081
Comprised of:
Cash at bank 24,589 32,081
Dividends and interest received in cash during the year amounted to
£31,348,000 and £56,000 (2021: £22,197,000 and £nil), respectively.
The accompanying notes are an integral part of these financial statements.
Notes to the Financial Statements
1. Accounting policies
Smithson Investment Trust plc is a company incorporated on 14 August 2018 in
the United Kingdom under the Companies Act 2006.
The financial statements of the Company have been prepared in accordance with
international accounting standards in conformity with the requirements of the
Companies Act 2006 and International Financial Reporting Standards (IFRSs) as
issued by the International Accounting Standards Board (IASB).
(a) Accounting convention
The financial statements have been prepared under the historical cost
convention (modified to include investments at fair value through profit or
loss) on a going concern basis and in accordance with UK‑adopted
international accounting standards in conformity with the requirements of the
Companies Act 2006 and IFRSs as issued by the International Accounting
Standards Board (IASB) and with the Statement of Recommended Practice ("SORP")
'Financial Statements of Investment Trust Companies and Venture Capital
Trusts' issued by the Association of Investment Companies ("AIC") in November
2014 (and updated in July 2022). They have also been prepared on the
assumption that approval as an investment trust will continue to be granted.
The Directors believe that it is appropriate to continue to adopt the going
concern basis for preparing the financial statements for the reasons stated in
the Annual Report. The Company is a UK listed company with a predominantly UK
shareholder base. The results and the financial position of the Company are
expressed in sterling, which is the functional and presentational currency of
the Company. The accounting policies have been disclosed consistently and in
line with Companies Act 2006.
(b) Critical accounting judgements and sources of estimation uncertainty
The Board confirms that no significant accounting judgements or estimates have
been applied to the financial statements and therefore there is not a
significant risk of a material adjustment to the carrying amounts of assets
and liabilities within the next financial year.
(c) Presentation of the Statement of Comprehensive Income
In order to better reflect the activities of an investment trust company, and
in accordance with guidance issued by the AIC, supplementary information which
analyses the Statement of Comprehensive Income between items of a revenue and
capital nature has been presented alongside the Statement of Comprehensive
Income. The net revenue is the measure the Directors believe appropriate in
assessing the Company's compliance with certain requirements set out in
section 1158 of the Corporation Tax Act 2010.
(d) Income
Income from investments (other than capital dividends), including taxes
deducted at source, is included in revenue by reference to the date on which
the investment is quoted ex-dividend, or where no ex-dividend date is quoted,
when the Company's right to receive payment is established. Special dividends
are credited to capital or revenue, according to the circumstances.
Interest receivable on cash at bank is recognised on an accruals basis.
(e) Expenses
All expenses, other than those of a capital nature, are charged to the revenue
account. Expenses of a capital nature are charged to the capital account.
Revenue and capital expenses are recognised on an accruals basis.
(f) Investments
Investments in equity instruments are classified upon initial recognition as
financial assets measured at fair value through profit or loss. Investments
are recognised and de-recognised at trade date where a purchase or sale is
under a contract whose terms require delivery within the time frame
established by the market concerned, and are initially measured at fair value.
Subsequent to initial recognition, investments are valued at fair value. For
listed investments, this is deemed to be bid market price. Gains and losses
arising from changes in fair value are included in net profit or loss for the
year as a capital item in the Statement of Comprehensive Income and are
ultimately recognised in the capital reserve.
Transaction costs incurred on the purchase and disposal of investments are
recognised as a capital item in the Statement of Comprehensive Income.
The Company derecognises a financial asset only when the contractual right to
the cash flows from the asset expire, or when it transfers the financial asset
and substantially all the risks and rewards of ownership of the asset to
another entity. On derecognition of a financial asset, the difference between
the asset's carrying amount and the sum of the consideration received and
receivable and the cumulative gain or loss that had been accumulated in equity
is recognised in capital in the Statement of Comprehensive Income.
(g) Foreign currencies
Monetary assets and liabilities denominated in foreign currencies are
translated into sterling at rates of exchange ruling at the date of the
Statement of Financial Position or at the related forward contract rate.
Transactions in foreign currency are converted to sterling at the rate ruling
at the date of the transaction. Differences in the sterling equivalent value
arising between the transaction date and the settlement or payment date are
included as exchange gains or losses in the capital account or the revenue
account depending on whether the underlying transaction is of a capital or
revenue nature.
(h) Cash and cash equivalents
Cash and cash equivalents comprise cash and demand deposits which are readily
convertible to a known amount of cash and are subject to insignificant risk of
changes in value.
(i) Equity dividends
Interim dividends are recognised in the period in which they are paid. Final
dividends are not recognised until approved by shareholders in the Annual
General Meeting.
(j) Other receivables and other payables
Other receivables and other payables do not carry any interest and are short
term in nature and are accordingly stated at their amortised cost, which is
the same as fair value.
Financial assets held at amortised cost are reviewed for impairment using the
expected credit loss model. Given the nature of the Company's short-term
receivables, no credit losses have occurred to date and no credit losses are
currently expected to occur in the future.
(k) Nature and purpose of reserves
Share capital
This represents nominal value of the issued share capital.
Share premium account
This account represents share premium that arose on the issue of new shares.
Capital reserve
This reserve reflects any:
· gains or losses on the disposal of investments
· foreign exchange gains and losses of a capital nature;
· the increases and decreases in the fair value of
investments which have been recognised in the capital account; and
· expenses which are capital in nature.
The capital reserve may be distributed by way of dividends. However, any gains
in the fair value of investments that are not readily convertible to cash are
treated as unrealised gains in the capital reserve and are non-distributable.
Revenue reserve
This reserve reflects all income and expenditure recognised in the revenue
account and is distributable by way of dividend.
Treasury shares
Treasury shares are recognised at cost as a deduction from equity
shareholders' funds. Subsequent consideration received for the sale of such
shares is also recognised in equity, with any difference between the sale
proceeds and the original cost being taken to share premium account. No gain
or loss is recognised in the financial statements on transactions in treasury
shares.
(l) Taxation
The charge for taxation is based upon the revenue for the year and is
allocated according to the marginal basis between revenue and capital using
the Company's effective rate of corporation tax for the accounting year.
Deferred taxation is recognised in respect of all timing differences that have
originated, but not reversed, relating to transactions or events that result
in an obligation to pay more or a right to pay less tax in future, that have
occurred at the Statement of Financial Position date. Deferred tax is measured
on an undiscounted basis and based on enacted tax rates. This is subject to
deferred tax assets only being recognised if it is considered more likely than
not that there will be suitable profits from which the future reversal of the
underlying temporary differences can be deducted. Timing differences are
differences arising between the Company's taxable profits and its results as
stated in the financial statements which are capable of reversal in one or
more subsequent periods. Due to the Company's status as an investment trust
company, and the intention to continue meeting the conditions required to
obtain approval in the foreseeable future, the Company has not provided
deferred tax on any capital gains and losses arising on the revaluation or
disposal of investments.
(m) Adoption of new and revised standards
At the date of authorisation of these financial statements the following
standards and amendments to standards, which have not been applied in these
financial statements, were in issue, but will be effective in the future
accounting periods.
· IFRS 17, 'Insurance contracts' (effective for accounting
periods beginning on or after 1 January 2023).
· Amendments to IAS1 'Classification of liabilities as
current or non-current' (effective for accounting periods beginning on or
after 1 January 2023).
· Amendments to IAS 8 'Definition of Accounting Estimates'
(effective for accounting periods on or after 1 January 2023).
· Amendments to IAS 1 and IFRS Practice Statement 2
'Disclosure of Accounting Policies' (effective for accounting periods on or
after 1 January 2023).
· Amendments to IAS 12 'Deferred Tax related to Assets and
Liabilities arising from a Single Transaction' (effective for accounting
periods on or after 1 January 2023).
The Company does not believe that there will be a material impact on the
financial statements or the amounts reported from the adoption of these
standards.
There were no new standards or interpretations effective for the first time
for periods beginning on or after 1 January 2022.
2. Dividend income
2022 2021
£'000
£'000
UK dividends 6,603 7,119
UK dividends - special 3,324 -
Overseas dividends 16,921 14,232
Overseas dividends - special 4,437 287
Bank interest 56 -
Total 31,341 21,638
3. Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business being the investment business. The Company's objective is
to be an investment for investors seeking increasing capital growth and income
over the long term. The accounting policies of the operating segment, which
operates in the UK, are the same as those described in the summary of
significant accounting policies. The Company evaluates performance based on
total profit before tax, which is shown in the Statement of Comprehensive
Income. A geographical split of the portfolio can be seen in the Strategic
Report.
4. Investment management fee
2022 2021
£'000 £'000
Investment management fee 21,998 25,884
As at 31 December 2022, an amount of £1,659,000 (2021: £2,576,000) was
payable to the Investment Manager. Details of the terms of the Investment
Management Agreement are provided in the Annual Report.
5. Other expenses
2022 2021
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Transaction costs on investments held at fair value
through profit or loss - 743 743 - 639 639
Directors' fees 135 - 135 120 - 120
Employer national insurance contributions - - - 5 - 5
Auditor fees in relation to audit(#) 47 - 47 36 - 36
Tax compliance fee (11) - (11) 20 - 20
Registrar fees 44 - 44 40 - 40
Broker fees 40 - 40 40 - 40
Company secretarial fees 93 - 93 117 - 117
Custody fees 190 - 190 338 - 338
Depositary fees 244 - 244 233 - 233
Postage and printing 30 - 30 28 - 28
Legal fees (23) - (23) 25 - 25
Fund administration fees 360 - 360 344 - 344
Other expenses* 314 - 314 237 - 237
Total Expenses 1,463 743 2,206 1,583 639 2,222
(#) The Auditor fee for the 2022 audit is £45,000.
* Other expenses include a net charge for unrecoverable VAT of £79,000 (2021:
£56,000 net charge), which includes £92,000 recovered in relation to 2022,
(2021: £181,000 recovered in relation to 2021).
Transaction costs on investments held at fair value through profit or loss
represent such costs incurred on both purchases and sales of those
investments. Transaction costs on purchases amounted to £538,000 (2021:
£593,000) and on sales amounted to £205,000 (2021: £46,000).
No non-audit fees were paid during the year to Deloitte LLP by the Company
(2021: nil).
6. Taxation
(a) Analysis of tax charge in the year
2022 2021
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Taxation on ordinary activities
Irrecoverable overseas withholding tax 3,670 - 3,670 2,540 - 2,540
Total tax 3,670 - 3,670 2,540 - 2,540
(b) The tax charge for the year is lower than the standard rate of corporation
tax in the UK of 19%. The differences are explained below:
2022 2021
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Profit/(loss) before tax 8,027 (972,021) (963,994) (5,854) 512,108 506,254
Corporation tax at standard rate of 19% 1,525 (184,684) (183,159) (1,112) 97,301 96,189
Effects of non taxable items:
UK dividends (1,886) - (1,886) (1,353) - (1,353)
Overseas dividends (4,058) - (4,058) (2,759) - (2,759)
Interest income (11) - (11) - - -
Net losses/(gains) on investments held at fair value through profit or loss - 184,467 184,467 - (97,529) (97,529)
Expenses and foreign exchange (gains)/losses (28) 217 189 5 228 233
Deferred tax asset not recognised 4,458 - 4,458 5,219 - 5,219
Total corporation tax - - - - - -
Irrecoverable overseas withholding tax 3,670 - 3,670 2,540 - 2,540
Total tax 3,670 - 3,670 2,540 - 2,540
As at 31 December 2022, the Company had unrecognised tax losses of £82.4
million (2021: £58.9 million) carried forward. Due to the Company's status
as an investment trust and the intention to continue to meet the conditions
required to obtain approval in the foreseeable future, the Company has not
provided deferred tax on capital gains and losses arising on the revaluation
or disposal of investments.
7. Return per share
Return per ordinary share is as follows:
2022 2021
Revenue Capital Total Revenue Capital Total
Profit/(loss) for the year (£'000) 4,357 (972,021) (967,664) (8,394) 512,108 503,714
Return/(loss) per ordinary share (p) 2.49 (555.60) (553.11) (5.27) 321.50 316.23
Return per share is calculated based on returns for the year and the weighted
average number of 174,950,862 ordinary shares in issue from 1 January 2022 to
31 December 2022. (2021: 159,284,761)
8. Dividends
There are no dividends proposed, declared or payable for the year (2021: nil).
9. Investments held at fair value through profit or loss
All investments are designated as fair value through profit or loss on initial
recognition, therefore all gains and losses arise on investments designated as
fair value through profit or loss.
2022 2021
As at 31 December £'000 £'000
Opening book cost 2,162,638 1,581,420
Opening investment holding gains 1,176,512 698,518
Opening fair value at 1 January 3,339,150 2,279,938
Purchases at cost 651,607 673,172
Sales - proceeds (626,030) (127,272)
(Loss)/gain on investments (970,879) 513,312
Closing fair value at 31 December 2,393,848 3,339,150
Closing book cost at 31 December 2,353,438 2,162,638
Closing unrealised gain at 31 December 40,410 1,176,512
Valuation at 31 December 2,393,848 3,339,150
The Company received £626,030,000 (2021: £127,272,000) excluding transaction
costs from investments sold in the year. The book cost of the investments when
they were purchased was £461,550,000 (2021: £92,593,000) excluding
transaction costs. These investments have been revalued over time until they
were sold and unrealised gains/losses were included in the fair value of the
investments.
All investments are listed.
Fair value of financial instruments
Under IFRS 13 'Fair Value Measurement' an entity is required to classify
investments using a fair value hierarchy that reflects the significance of the
inputs used in making the measurement decision.
The following shows the analysis of financial assets recognised at fair value
based on:
· Level 1 - quoted prices in active markets for identical
instruments.
· Level 2 - other significant observable inputs (including
quoted prices for similar investments, interest rates, prepayments, credit
risk, etc.).
· Level 3 - significant unobservable inputs (including the
Company's own assumptions in determining the fair value of investments).
Fair value measurements recognised in the Statement of Financial Position
2022
Level 1 Level 2 Level 3 Total
As at 31 December £'000 £'000 £'000 £'000
Investments held at fair value through profit or loss 2,393,848 - - 2,393,848
Total 2,393,848 - - 2,393,848
2021
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Investments held at fair value through profit or loss 3,339,150 - - 3,339,150
Total 3,339,150 - - 3,339,150
10. Receivables
2022 2021
As at 31 December £'000 £'000
Accrued income 182 247
Overseas tax recoverable 1,810 896
Securities sold receivable 1,761 -
Other receivables 100 60
3,853 1,203
The above receivables do not carry any interest and are short term in nature.
The Directors consider that the carrying values of these receivables
approximate their fair value.
11. Payables
2022 2021
As at 31 December £'000 £'000
Securities purchased payable 2,399 2,265
Investment management fee payable 1,659 2,576
Other payables 265 523
4,323 5,364
12. Share capital
2022 2021
Ordinary Treasury Total Nominal Total Nominal
Shares Shares Shares Value Shares Value
As at 31 December Number Number Number £'000 Number £'000
Issued, allotted and fully paid (ordinary)
Ordinary shares in issue at 1 January 171,697,958 - 171,697,958 1,717 141,420,958 1,414
Ordinary shares issued 5,410,000 - 5,410,000 54 30,277,000 303
Ordinary shares bought back and held in treasury (5,700,000) 5,700,000 - - - -
171,407,958 5,700,000 177,107,958 1,771 171,697,958 1,717
During the year ended 31 December 2022, the Company issued 5,410,000 (2021:
30,277,000) shares of £0.01 each for a net consideration of £92,544,000
(2021: £531,406,000).
During the year ended 31 December 2022, the Company bought back to hold in
treasury 5,700,000 shares (31 December 2021: nil) at an aggregate cost of
£73,983,000 (31 December 2021: nil). At the year end, the Company held
5,700,000 (31 December 2021: nil) shares in treasury.
Details of the shareholder authorities granted to Directors to issue and buy
back shares during the year are provided in the Annual Report.
13. Share premium account
2022 2021
As at 31 December £'000 £'000
Balance at 1 January 2,126,997 1,595,894
Issue of new shares on secondary market 93,050 533,918
Costs on new share issues on secondary market (560) (2,815)
2,219,487 2,126,997
14. Net asset value per share
As at 31 December 2022 2021
Net asset value £2,417,967,000 £3,367,070,000
Shares in issue 171,407,958 171,697,958
Net asset value per ordinary share 1,410.7 1,961.0p
15. Risk management and financial instruments
The Company's investing activities undertaken in pursuit of its investment
objective, as set out in the Strategic Report, involve certain inherent risks.
The Board monitors the Company's risk as described in the Strategic Report.
The main risks arising from the Company's financial instruments are market
price risk, interest rate risk, liquidity risk, credit risk and currency risk.
The Board reviews and agrees policies for managing each of these risks as
summarised below. These policies have remained substantially unchanged during
the current year.
Market price risk
Market price risk arises mainly from uncertainty about future prices of
financial instruments used in the Company's business. It represents the
potential loss the Company might suffer through holding market positions in
the face of price movements. The Board meets on four scheduled occasions in
each year and at each meeting it receives sufficient financial and statistical
information to enable it to monitor adequately the investment performance and
status of the business. The Board has also established a series of investment
parameters, per the Company's investment policy, designed to manage the risk
inherent in managing a portfolio of investments.
Interest rate risk
Interest rate risk is the risk of movements in the value of, or income from,
cash balances that arise as a result of fluctuations in interest rates. The
Company finances its operations through equity and retained profits including
capital profits, with no additional financing.
Liquidity risk
The Company's assets comprise mainly readily realisable securities, which can
be sold to meet funding commitments if necessary. Short-term flexibility is
achieved through the use of cash balances and short-term bank deposits. All
payables are due within three months.
Credit risk
Credit risk is the risk that one party to a financial instrument will fail to
discharge an obligation and cause the other party to incur a financial loss.
This is mitigated by the Investment Manager reviewing the credit ratings of
broker counterparties and key third party service providers. The risk attached
to dividend flows is mitigated by the Investment Manager's research of
potential investee companies. The Company's custodian bank is responsible for
the collection of income on behalf of the Company. Cash is held with Northern
Trust Company which has a Fitch rating of AA-.
The carrying amounts of financial assets best represents the maximum credit
risk exposure at the Statement of Financial Position date, and the main
exposure to credit risk is via the Company's custodian who is responsible for
the safeguarding of the Company's investments and cash balances.
At the reporting date, the Company's financial assets exposed to credit risk
amounted to the following:
2022 2021
As at 31 December £'000 £'000
Cash and cash equivalents 24,589 32,081
Receivables 3,853 1,203
28,442 33,284
All the assets of the Company which are traded on a recognised exchange are
held by Northern Trust, the Company's custodian. Bankruptcy or insolvency of
the custodian may cause the Company's rights with respect to securities held
by the custodian to be delayed or limited.
Currency risk
The income and capital value of the Company's investments and liabilities can
be affected by exchange rate movements as some of the Company's assets and
income are denominated in currencies other than sterling which is the
Company's functional currency. The key areas where foreign currency risk could
have an impact on the Company are:
· movements in rates that would affect the value of
investments, assets and liabilities; and
· movements in rates that would affect the income received.
The Company had the following currency exposures, all of which are included in
the Statement of Financial Position at fair value based on the exchange rates
ruling at the year end.
31 December 2022 31 December 2021
Investments Cash Receivables Payables Total Investments Cash Receivables Payables Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 - £'000
Australian Dollar 157,673 - 1,761 (1,761) 157,673 219,406 - - - 219,406
Danish Krone 202,662 507 323 (2,399) 201,093 172,599 - 144 - 172,743
Euro 387,099 - 346 - 387,445 342,925 - 167 - 343,092
New Zealand
Dollar 68,459 - - - 68,459 72,356 - 2,265 (2,265) 72,356
Swedish Krona 51,686 - 156 - 51,842 - - - - -
Swiss Franc 149,073 - 985 - 150,058 218,311 - 586 - 218,897
US Dollar 958,501 110 - - 958,611 1,603,229 137 - - 1,603,366
1,975,153 617 3,571 (4,160) 1,975,181 2,628,826 137 3,162 (2,265) 2,629,860
The Company mitigates the risk of loss due to exposure to a single currency by
way of diversification of the portfolio.
Foreign currency sensitivity
At 31 December 2022, an exchange rate move of +/-5% (2021: +/-5%) against
sterling which is a reasonable approximation of possible changes would have
increased or decreased total net assets and total return by £98,759,000
(2021: £131,493,000).
Interest rate risk
The majority of the Company's financial assets are equity shares and other
investments which neither pay interest nor have a maturity date. The Company's
cash balance of £24,589,000 (2021: £32,081,000) earns interest, calculated
on a tiered basis, depending on the balance held, by reference to the base
rate. The level of interest paid fluctuates in line with the base rate. At
31 December 2022 the interest rate was 1.4% (2021: 0%).
From interest earned on the Company's cash balances, an increase or decrease
in interest rates of 0.5% would have a positive or negative impact
respectively on the profit or loss and net assets of the Company equating to
£123,000 (2021: £160,000). The calculations are based on the cash balances
at the year end date and are not representative of the year as a whole.
No current liabilities incur interest and all are payable within one year.
Other price risk exposure
If the investment valuation had fallen by 20% (2021: 20%) at 31 December 2022,
the impact on profit or loss and net assets would have been negative
£478,769,600 (2021: £667,830,000). An increase of 20% (2021: 20%) would have
had an equivalent opposite effect. The calculations are based on the portfolio
valuations as at the respective year end date and are not representative of
the year as a whole, as well as the assumption that all other variables
remained constant.
The Company held the following categories of financial instruments, all of
which are included in the Statement of Financial Position at fair value.
2022 2021
As at 31 December £'000 £'000
Assets at fair value through profit or loss 2,393,848 3,339,150
Cash and cash equivalents 24,589 32,081
Investment income receivable 182 247
Securities sold receivable 1,761 -
Other receivables 100 60
Payables (4,323) (5,364)
2,416,157 3,366,174
Non-financial assets held at fair value
Overseas tax recoverable 1,810 896
Net assets 2,417,967 3,367,070
Liquidity risk exposure
This is the risk that the Company will encounter difficulty in meeting
obligations associated with financial liabilities. All payables are due within
three months.
Liquidity risk is not significant as the majority of the Company's assets are
investments in quoted securities that are easily and readily realisable. The
Company does not have any borrowing facilities and as at 31 December 2022 held
£24,589,000 (2021: £32,081,000) in cash.
Capital management policies and procedures
The Company's capital management objectives are to ensure that it will be able
to continue as a going concern, and to provide long-term growth in revenue and
capital.
The Company's capital is its equity share capital and reserves that are shown
in the Statement of Financial Position at a total of £2,417,967,000 (2021:
£3,367,070,000).
The Board, with the assistance of the AIFM, monitors and reviews the broad
structure of the Company's capital on an ongoing basis. This includes a review
of the planned level of gearing (if any), the need to repurchase or issue
equity shares, and the extent to which any revenue in excess of that which is
required to be distributed be retained.
16. Contingent liabilities
As at 31 December 2022 there were no contingent liabilities or capital
commitments (2021: nil).
17. Related party transactions
IAS 24 'Related party disclosures' requires the disclosure of the details of
material transactions between the Company and any related parties.
Accordingly, the disclosures required are set out below:
Directors - The remuneration of the Directors totalling £137,500 (2021:
£120,000), is set out in the Directors' Remuneration Report in the Annual
Report. There were no contracts subsisting during or at the end of the year in
which a Director of the Company is or was interested and which are or were
significant in relation to the Company's business. There were no other
material transactions during the year with the Directors of the Company. The
Company has no employees.
AIFM and Investment Manager - Details of the contract including the
remuneration due to the AIFM and Investment Manager are set out in the Annual
Report.
Terry Smith and other founder partners and key employees of the AIFM and
Investment Manager directly or indirectly and in aggregate, held 2,919,112
(2021: 3,073,866) shares in the Company amounting to 1.7% (2021: 1.7%) of the
issued share capital of the Company as at 31 December 2022.
18. Events after the reporting period
Since the year end and up to 22 February 2023 (the latest practical date
before publication of the Annual Report), the Company has bought back to hold
in treasury 1,050,000 ordinary shares at an aggregate cost of £15.0 million.
On 6 February 2023, shareholder approval was obtained to apply to the High
Court to reduce the Company's share premium by £500 million. The capital
reduction, if approved by the High Court, will result in a corresponding
increase in the Company's distributable reserves.
19. Financial information
This announcement does not constitute the Company's statutory accounts. The
financial information is derived from the statutory accounts for the year
ended 31 December 2022, which will be delivered to the Registrar of Companies
after being put forward for adoption at the Company's Annual General Meeting.
The auditors have reported on the accounts for the year ended 31 December
2022, their report was unqualified and did not include a statement under
Section 498(2) or (3) of the Companies Act 2006.
The Annual Report for the year ended 31 December 2022 was approved by the
Board on 27 February 2023. It will be made available on the Company's
website at www.smithson.co.uk
The Annual Report will be submitted to the National Storage Mechanism and will
shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
This announcement contains regulated information under the Disclosure Rules
and Transparency Rules of the FCA.
20. Annual general meeting
The Annual General Meeting will be held at 1.00 p.m. on 27 April 2023 at the
Max Rayne Auditorium, The Royal Society of Medicine, 1 Wimpole Street,
Westminster, London W1G 0AE. Details of the meeting are available in the
Notice of Meeting published on the Company's website www.smithson.co.uk.
28 February 2023
Secretary and registered office:
Apex Listed Companies Services (UK) Limited
6th Floor
125 London Wall
London
EC2Y 5AS
For further information contact:
Apex Listed Companies Services (UK) Limited
Tel: 020 3327 9720
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