Annual Financial Report
27/02/2024 07:00
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RNS Number : 5068E Smithson Investment Trust PLC 27 February 2024
SMITHSON INVESTMENT TRUST PLC
LEI: 52990070BDK2OKX5TH79
RESULTS ANNOUNCEMENT
Audited results for the year ended 31 December 2023
Performance Highlights
At At
31 December 2023 31 December 2022
Net assets £2,551,938,000 £2,417,967,000
Net asset value ("NAV") per ordinary share ("share") 1,598.0p 1,410.7p
Share price 1,415.0p 1,308.0p
Share price discount to NAV(1) 11.5% 7.3%
For the period from
Company's listing on
For the year ended For the year ended 19 October 2018 to
31 December 2023 31 December 2022 31 December 2023
% change(2) % change(2) % change(2)
NAV total return per share(1) +13.3% -28.1% +59.8
Share price total return(1) +8.2% -35.2% +41.5
Comparator index total return(3) +9.1% -8.7% +47.2
Ongoing charges ratio(1) 0.9% 0.9% 1.0%
Source: Bloomberg
This report contains terminology that may be unfamiliar to some readers. The
Glossary at the back of the Annual Report gives definitions for frequently
used terms.
5 Year Record
At 31 December 2023 2022 2021 2020 2019
Net assets £2,551,938,000 £2,417,967,000 £3,367,070,000 £2,331,950,000 £1,437,305,000
NAV per ordinary share 1,598.0p 1,410.7p 1,961.0p 1,648.9p 1,255.2p
Share price 1,415.0p 1,308.0p 2,020.0p 1,710.0p 1,298.0p
Share price (discount)/
premium to NAV(1) (11.5)% (7.3)% 3.0% 3.7% 3.4%
Year ended 31 December
NAV total return
per share(1) +13.3% -28.1% +18.9% +31.4% +33.2%
Share price total return(1) +8.2% -35.2% +18.1% +31.7% +29.8%
Comparator index total
return(3) +9.1% -8.7% +17.8% +12.2% +21.9%
Ongoing charges ratio(1) 0.9% 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 ended 31 December 2023.
This is our fifth Annual Report since the inception of the Company in October
2018, and as five years is probably the minimum period one could regard as
being "long term", it is appropriate to comment on the Company's performance
over this period.
The Company's Net Asset Value ("NAV") per share has increased by 59.8%, an
annualised rate of 9.4%. This represents an outperformance compared with the
Company's reference index, the MSCI World SMID Index, which has returned 47.2%
over the same period, an annualised rate of 7.7%. As the Investment Manager
points out in his report, this is the best performance of any investment trust
included within the AIC Global Smaller Companies sector.
Investors in the Company hold shares which are traded on the London Stock
Exchange, and the price of the Company's shares has, since early in 2022,
lagged below the NAV per share. This discount widened during 2023 with the
share price at the end of the year 11.5% lower than the NAV per share. This
has adversely affected the return that shareholders have been able to realise,
with the share price return over the period since inception amounting to
41.5%, an annualised return of 6.9%.
Performance in 2023
The Company's NAV per share increased by 13.3% in the year, outperforming the
MSCI World SMID Index by 4.2 percentage points.
This is a pleasing "return to form" after the underperformance in 2022 - which
is the only calendar year in which the Company has underperformed the Index -
and one which I hope provides shareholders with confidence in the future. No
investment strategy can be expected to outperform in all market conditions,
and although the underperformance in 2022 was significant, it was short lived,
and reflected the combination of rising interest rates and the characteristics
of the portfolio at that time. The Investment Manager's report discusses the
performance, the lessons learned in 2022 and the action taken since then.
As I noted above, the Company's shares, which had traded at a premium to NAV
for the vast majority of the period from launch in 2018 through to the end of
2021, started trading at a discount in early 2022 and have continued to do so
throughout 2023. The discount, which at the beginning of the year was 7.3%,
widened to 11.5% at the end of the year. This reduced the share price total
return in 2023 to 8.2%, 0.9 percentage points lower than the Index return. The
Board's actions in response to the discount are summarised below.
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. The Company is a member of the FTSE 250 index, and with 159.7 million
shares in issue, the Company's market capitalisation at the end of 2023 was
£2.26 billion.
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 regularly to meet
demand and to manage the premium. When the Company's shares started trading at
a discount the Board, in consultation with its advisers and the Investment
Manager, took action to mitigate the discount through the use of share buy
backs.
During 2023 the Company bought back 11,715,000 shares at a cost, including
stamp duty and dealing charges of £159.3 million, representing 6.8% of the
shares outstanding at the start of the year. Since the buyback programme
commenced in early 2022 the Company has bought back 19,065,000 shares
representing 10.8% of the shares outstanding before the programme started.
This is one of the largest buyback programmes in the investment trust sector.
With the widening of the discount in the first half of 2023, the Company
increased its rate of buybacks in the second half.
The buybacks in 2023 were at an average discount to NAV of 10.8% and, since
the start of the programme, at an average discount to NAV of 10.2%. The
buybacks are accretive for remaining shareholders, and in 2023 generated
approximately £18.0 million of NAV accretion, equivalent to around 82.5% of
the Company's 2023 fees and expenses. As the Investment Manager's fees are
based on the Company's market capitalisation rather than its net asset value,
the discount also reduced the investment management fees during the year.
While the programme has not sustainably reduced the discount, we cannot of
course say for certain what would have happened to the Company's share rating
if we had not bought back shares; and we have in any event secured NAV
accretion, reduced share price volatility and provided reassurance to the
Company's shareholders and the wider market that the Board is cognisant of the
need for a proactive buyback policy. Discounts are a common problem across the
entire investment trust industry and the average discount in the AIC Global
Smaller Companies sector widened to 13.6% at 31 December 2023.
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 they feel 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. The capital reduction was
sanctioned by the High Court and completed in March.
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 accordingly be proposed at the forthcoming Annual General Meeting.
Continuation Vote
The average discount in 2023 was 10.7%, in excess of the 10% threshold
requiring the Directors to consider whether to propose a continuation vote at
the Annual General Meeting.
The Directors, together with the Company's advisers, and the Investment
Manager, have discussed this and concluded that it would not be appropriate to
put a continuation vote to the AGM. In making this decision, the Board noted
that the level of discount predominantly reflects broader market conditions
and the fact that the Company's discount, albeit higher than the Board would
like, is lower than the average of its peers. This is therefore a market
problem rather than being specific to the Company. This decision additionally
reflects the Company's strong NAV performance over both the short and long
term (both in absolute terms and relative to the comparator index) as well as
the Board's confidence in the future prospects of the Company.
Results and Dividends
The Company's total profit after tax for the year was £293 million,
comprising a capital profit of £290 million and a revenue profit after tax
of £3 million.
The revenue profit after tax arises because the Company's dividend income in
the year net of the withholding tax suffered was higher than its operating
expenditure. All the Company's operating expenditure (other than those
expenses of a capital nature) 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 2023,
and therefore a dividend is not proposed by the Board.
The Company has never paid a dividend, and 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.
The Company expects to hold between 25 and 40 investments; at the year-end it
held 33. The composition of the portfolio at 31 December 2023 is shown below,
and the Investment Manager's Review explains the investment approach, and the
performance and evolution of the portfolio in detail. Whilst the Investment
Manager has made adjustments to the portfolio in the current year, the
investment approach is unchanged.
Governance
The Board comprises four independent, non-executive directors. Following
Denise Hadgill's appointment in June 2022, the Board comprises two women and
two men and accordingly meets the gender diversity targets recommended for
FTSE 250 listed companies. The Company has a small Board which is appropriate
for the nature of its activities and as the Company was only formed in 2018,
its Board succession plan has not yet reached maturity. As such, there has not
yet been an appropriate opportunity to appoint an ethnic minority Director to
meet the FCA's targets for FTSE 250 listed companies. The Board has resolved
that it is not in shareholders' best interests to increase the Board size
simply to achieve this target. Nevertheless, the Board recognises the benefit
of diversity and it hopes to be fully compliant with the FCA's guidelines when
it makes its next Board appointment.
All Directors will stand for re-election at the AGM and details on our
background and experience are given in the Annual Report.
Sustainability and Environment, Social and Governance Considerations ("ESG")
In recognition of investor interest in ESG matters the Board held a meeting to
review the Investment Manager's approach to responsible investment and how
sustainability (including ESG factors) is incorporated into the investment
process. The Investment Manager's stewardship responsibilities were also
discussed.
Whilst ESG matters are routinely reported by investment trusts, there are a
few observations I would make about how Fundsmith approaches the area slightly
differently. Firstly, the focus is on whether an investee company's business
model is sustainable and is capable of surviving economic cycles over the long
term - which includes, but is much broader than, a review of ESG factors.
Secondly the approach to stewardship is distinct. With a relatively small
portfolio of investments to oversee, the Investment Manager is able to engage
more regularly with all of the Company's investee company boards. Furthermore,
there is no outsourcing of voting to outside agencies or indeed to other
Fundsmith departments; the investment management team does it all itself. The
people looking after our money are therefore actively engaged in all aspects
of stewarding our investments. I personally find that most reassuring.
Fundsmith's Stewardship Report 2022 is available on the Company's website, and
Fundsmith's application to remain a signatory to the FRC's Stewardship Code
was approved in August 2023.
A statement from the Investment Manager on its Responsible Investment policy
and its application to the Company is included below.
Annual General Meeting ("AGM") and Shareholder Engagement
The Company will hold its AGM on 25 April 2024. 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.
(mailto: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. A light lunch will be provided after
the meeting.
We encourage shareholders to visit the Company's website where more
information is available on the Company.
Outlook
Our portfolio manager concludes his review by stating that the team ended the
year with significant optimism for the future, reflecting their view that the
portfolio positioning is the best they believe it has ever been, and that the
interest rate cycle is almost certainly at its peak. The Board shares that
optimism.
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
globally in the small and mid-cap sector, the long-term investor will be well
rewarded.
Diana Dyer Bartlett
Chairman
26 February 2024
Investment Manager's Review
The Investment Manager's Review was first published as a letter to
shareholders on 26 January 2024 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 2023.
Dear Fellow Shareholder,
The performance of Smithson Investment Trust ('Smithson'), along with
comparators, is laid out below. In 2023 the Net Asset Value per share (NAV) of
the Company increased by 13.3% and the share price increased by 8.2%. Over the
same period, the MSCI World Small and Mid-Cap Index ('SMID'), our reference
index, increased by 9.1%. I also provide the performance of UK bonds and cash
for comparison.
Total Return(5) Launch to 31 December 2023
1 January 2023
to 31 December 2023
%
Cumulative Annualised
% %
Smithson NAV(1) +13.3 +59.8 +9.4
Smithson Share Price +8.2 +41.5 +6.9
Small and Midcap Equities(2) +9.1 +47.2 +7.7
UK Bonds(3) +5.6 -4.9 -1.0
Cash(4) +4.6 +7.5 +1.4
(1) Source: Bloomberg, starting NAV 1000.
(2) MSCI World SMID Cap Index, £ Net source: www.msci.com.
(http://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 Annual Report)
We are pleased to have generated a NAV return of 13.3% during a relatively
volatile period for the market, and in doing so, to have outperformed the
reference index.
2023 saw the 5th anniversary of the launch of the Smithson Investment Trust
and over the last five years Smithson is the best performing trust in the
Association of Investment Companies Global Smaller Companies sector and is
more than 20 percentage points ahead of the average performance of the
sector(1). Further, while the NAV compound return of 9.4% is ahead of our
reference index, given the current low point in the market we would hope for
greater absolute performance in the future should the market provide the
backdrop to achieve this.
We are disappointed that the share price performance of Smithson has lagged
the NAV performance during the last couple of years. The chart in the Annual
Report shows the average trust sector discount over the last 15 years and one
can see that not even in the depths of the financial crisis in 2008/09 did
trust discounts get to the same level as that reached in 2023.
(1) NAV performance over five years to 31.12.2023
Smithson is not immune to this, and we believe that despite the regular share
buybacks conducted by the Board, our discount has been exacerbated by this
market phenomenon. This sector discount is a clear indicator of the recent
bear market in equities, and so long as our performance continues to be
satisfactory, there is one key factor in the eventual resolution of this
situation: time. I believe there will come a future period, unknowable in
advance, when market sentiment allows Smithson to once more trade at a
premium.
It has been a busy 12 months, taking advantage of low prices during the weak
market to improve and diversify the portfolio. After these actions, we are
unashamedly enthusiastic about what we now own. The portfolio is without doubt
in the best shape it has been since inception and I am excited to share the
changes with you, but first I must explain our state of mind.
Our lifetime is finite. This is known by all but accepted by few, outside of
possibly those who have received a terminal medical diagnosis. I don't wish to
be morbid but only to emphasise the point that what you do with your time in
any given moment is an active choice to exclude every other option, as you
will never have time to do everything. It is the same for constructing a
concentrated portfolio. As there are only a certain number of companies we
can hold at any given moment we have to exclude the tens of thousands of other
companies we could own. Which is a good thing, because just as one ought to be
highly selective as to how to spend one's time, it makes us choose our
investments very carefully.
It was Peter Lynch who coined the word 'diworsification' to describe the
problem with including different assets of dubious quality with the sole
intention of increasing diversification. We have not done this. We believe
every one of the companies we have acquired to be of very high quality, and we
have funded these purchases with companies we felt were below the average
quality in the portfolio.
The new companies we invested in this year were Graco, Exponent, Oddity, Croda
and Clorox and those we sold to facilitate this were Domino's Pizza Group,
Rightmove and Masimo.
Graco - pronounced Gray-co after the founding Gray brothers - is a US company
which designs, manufactures and markets systems and equipment to measure and
dispense fluid and powdered materials. Founded in 1926, it is the market
leader in technology and expertise for the management of fluids and coatings
in both industrial and commercial applications. We were attracted by its
stable operating margin of over 25% and high return on invested capital of
40%. These metrics have been achieved over a long period of time, and we hope
will continue long into the future, thanks to the fact that its products are
of very high quality and are sold under brands which are trusted by customers
to help solve manufacturing problems, increase productivity, conserve energy,
save material, control environmental emissions and reduce labour costs. We
also feel we were provided a good entry point in terms of valuation as worries
about a recession in the US, had caused share price weakness.
Exponent took the fund into a new sector of consulting. This industry can be
highly competitive and doesn't often have the ability to grow quickly and
profitably through operating leverage as they need more staff to bill more
hours. As is often the case in human capital businesses, the humans tend to
take the majority of the returns at the expense of the business (think
investment banks). However, Exponent is different. It was founded in 1967 in
California as Failure Associates, which is appropriate as it focuses on highly
technical areas across a broad range of scientific disciplines, often in
response to disasters or litigation. For instance, they did investigative work
for the Challenger shuttle explosion, the Piper Alpha oil platform disaster,
the 9/11 World Trade Centre collapse, the Exxon Valdez oil spill, Samsung's
exploding tablets, and the preliminary fire investigation into Grenfell Tower.
They have assembled the largest group of PhD scientists in the industry for
this purpose and are the clear number one player, able to command healthy fees
for such specialist projects which do not get passed straight on to the
employees. They are mainly being used to defend companies against litigation
(which also tends to be price insensitive) or by companies wishing to
investigate their own products before launch, such as autonomous driving
systems.
Croda is a UK company and the first chemical ingredients company we have
bought. Founded in 1925 it wasn't until after WWII that the company moved into
cosmetics and fragrances, and now only produces substances from natural and
renewable resources, unlike some competitors which still use refined fossil
fuels. The company also provides ingredients for life sciences, including
being the number one provider of a key component for mRNA delivery systems,
which are finding many new applications since their well-publicised use for
Covid vaccines. It is their leading market positions in niches such as these,
where they produce small but critical components for larger, high value
products that makes Croda so interesting to us.
One particular area of success over the last five years was investing in high
quality companies that were going through what we call a 'glitch' in their
business. This includes companies like Equifax, the US credit data bureau,
which we bought in the aftermath of a major cyber-attack which compromised
over 150 million consumer records. Despite the large amounts of capital spent
by management to improve the security of the company after the attack, and the
recent headwinds due to lower mortgage origination, it has still proven to be
one of our best performing investments.
Interestingly, we feel we may have just been given a similar opportunity with
Clorox. The US household goods company suffered a cyber-attack in August which
closed down its operation systems for a few days and resulted in the shares
falling over 30% from the recent peak. We started buying the company's shares
once the attack had been contained and we believe it has given us a rare
opportunity to buy a high quality consumer staples company within our market
capitalisation range at a very attractive valuation. Clorox produces branded
goods from bleach to cat litter with a track record of strong profitability
and steady growth. Regarding the prior point on diversification, it is also
quite different to anything else we currently own in the portfolio, in fact in
numerical terms it has the lowest historical correlation with the fund of any
company in our Investible Universe.
Oddity is another atypical investment for us but one which we believe has
substantial opportunity for growth. It is the first ever IPO we have taken
part in, and we did not do so lightly. We got to know the management several
months before the IPO as we were approached directly by the company after they
had been made aware that the business exhibited much of what we look for in a
high quality, growing company. We were extremely impressed by the track record
as well as the potential opportunity for the company. Oddity is a beauty and
wellness company which creates its own brands and products to sell direct to
consumers online. So far, the company has launched two brands, Il Makiage and
SpoiledChild, both of which have been the fastest growing online brands in
history, and now sell more online than large established beauty brands such as
MAC. Traditionally there has been a large knowledge gap between consumers and
beauty experts, requiring consumers to interact with a trained salesperson to
match the myriad of beauty products to their needs and show them how to apply
them at home. The large established cosmetics companies haven't so far made
strong attempts to sell products to new customers online (refill purchases are
obviously easier) but Oddity has been able to build AI technology using data
from their users - 1bn datapoints from 40m users - to 'learn' how to match the
right products to consumers with inputs including online questionnaires and,
increasingly, selfie photos. Their 90% skin match accuracy compared to 80%
in-store equivalent has generated over 4m customers, with more than half of
revenue now coming from repeat customers. This is not only a strong indication
of the value of their service but is also much more profitable. We expect to
see very high annual revenue growth for the next few years as the company's
technology is several years ahead of established competitors and addresses
such an enormous potential market.
Rightmove was one company we sold to facilitate these new investments.
OnTheMarket, a weak third tier competitor to Rightmove, was recently acquired
by the much larger US company CoStar, which has a history of competing
aggressively in the new markets it enters. Even if Rightmove with its dominant
number one position wins this war, there could well be a few years of bitter
and expensive competition before it's over. We therefore sold our holding of
Rightmove soon after the bid was announced.
We sold other businesses where we had doubts about management actions.
Domino's Pizza Group had caused us consternation for some time due to the
fairly regular turnover of its senior management team. During the period of
our ownership we counted four CEOs and four CFOs, and along with mediocre
performance for many of those years, our patience eventually wore out.
Masimo is another where we were disappointed by management action, although
this team has stayed in place as the CEO is the founder and a large
shareholder. The company has a fantastic core business selling best in class
sensors to hospitals but management decided to branch out into consumer
medical devices, and bought an audio equipment business selling speakers,
headphones and home theatre systems because of its access to retail outlets.
The situation was further complicated by an activist investor who, after
several meetings with us appeared quite sensible, but whom the management team
chose to oppose. The final straw came with a profit warning only a few weeks
after management had reassured us that everything was 'fine'. This ultimately
led to us losing faith and we felt we could no longer trust them to be good
stewards of your capital.
Despite these changes our strategy remains the same:
· Buy good companies
· Don't overpay
· Do nothing
To demonstrate that we are still buying good companies, I 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
ROIC 59%(#) 10%
Gross Margin 61% 34%
Operating Profit Margin 24% 6%
Cash Conversion 97% 71%
Interest Cover 34x 8x
Source: Fundsmith
Data for the MSCI World SMID Cap Index is shown ex-financials, with weightings
as at 31.12.2023.
Data for MSCI World SMID Cap Index is on a weighted average basis, using last
available reported financial year figures as at 31.12.2023.
Data for Smithson is on a weighted average basis, ex-cash, using last
available reported financial year figures as at 31.12.2023.
Interest cover (EBIT ÷ net interest) data for Smithson and MSCI World SMID
Cap Index is done on a median average basis.
# ROIC for Smithson includes Verisign (835% ROIC). Excluding Verisign the ROIC
is 26%.
The table shows that our portfolio companies remain superior to those in the
Index on every metric, most of which are significantly in excess of that
observed for the Index. The ROIC is particularly high at 59% although this
does include Verisign, with a ROIC of 835%, without which the average ROIC
would be 26%. Both of these average figures are higher than the 43% and 23% of
last year. All other metrics are broadly similar to 2022 except the cash
conversion, which is lower than the 101% recorded last year. As explained in
the 2022 report, cash flow has been depressed for many of our companies due to
the re-build of inventory after supply chains returned to normal following the
Covid pandemic. This is already starting to improve and will likely continue
to do so in 2024.
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. While the valuation currently appears expensive, with the
free cash flow yield of the portfolio now at 2.4%, the method we have
traditionally used to calculate it is very backward looking, with the
valuation for many companies being generated by 2022 cash flows due to the
timing of their reports. As mentioned above, this includes a significant
period when cash flow was depressed. Adjusting the measure to use only 2023
cash flows would put the portfolio free cash flow yield at around 2.8%, which
we think is more indicative of the current position, bearing in mind we expect
more progress on free cash flow normalisation in 2024. Further, a couple of
our companies are still recovering from specific issues which have completely
depleted their free cash flow, so should these companies start producing cash
again next year, as appears likely, it would potentially take the portfolio
free cash flow yield back above 3%.
In terms of 'doing nothing', there was some trading activity as discussed
earlier. This meant that discretionary portfolio turnover, excluding share
buybacks, was 27.2% compared to 48.5% in 2022. Excluding the sale and
reinvestment of the proceeds from the Simcorp bid, over which we had no
choice, the turnover was 15.4%. Despite the changes made to the portfolio,
this is much lower than last year and still far below the average turnover for
actively managed equity funds, which tends to be above 60%, according to
Morningstar.
Costs of dealing, including taxes, amounted to 0.03% (3 basis points) of NAV
in the period, slightly lower than the 0.03% incurred in 2022, although both
figures round to the same number. The Ongoing Charge Figure was 0.87% of NAV,
compared with 0.91% in 2022. This includes the Management Fee of 0.9%, applied
to the market capitalisation of the Trust, which was lower than the NAV during
the year. Combined, this means the Total Cost of Investment in the Trust was
0.90% of NAV (2022: 0.94%).
To review in more detail the fund performance in 2023, I highlight the largest
detractors of performance below.
Country Contribution %
Sabre United States -1.5%
Masimo United States -1.2%
Paycom Software United States -0.7%
Cognex United States -0.5%
Domino's Pizza Enterprises Australia -0.5%
Source: Northern Trust
Sabre, travel software company, was the largest detractor in 2023 for two
reasons. First, during the course of the year it became apparent that travel
industry volumes, whilst still recovering, were growing slower than the rates
seen in 2021 and 2022. Second, Sabre took on significant debt during the
pandemic and the company's profitability was therefore impacted by the sharp
rise in interest rates. We continue to believe that the travel industry will
keep growing, which will in turn enable the company to reduce its debt over
time to the benefit of our equity investment.
Our issues with Masimo have been outlined above and although we made money on
the position over our period of ownership, having sold shares at much higher
levels during the pandemic, we unfortunately lost money on the remaining
holding during the course of this year.
Paycom, the US company providing human resources management software,
underperformed after management reduced its guidance for revenue growth this
year. With revenue tied to the number of employees enrolled in its software,
the weaker US jobs market over the last 12 months provided a more difficult
backdrop for the company's short term growth.
Cognex, the US factory and warehouse automation company, suffered declining
revenue and earnings throughout the year as its largest customers held back on
building or upgrading their manufacturing and logistics facilities. Consumer
electronics was a sector particularly hard hit. As we see no fundamental
issues with the company or its competitive position, we continue to hold as we
wait for the expected upturn to arrive in the coming years.
The performance of Domino's Pizza Enterprises was also disappointing in the
period. This was primarily due to the fiscal half year results, released in
February, indicating weaker sales after prices and delivery charges had been
increased to offset cost inflation. Consumer price sensitivity was noted in
Japan and Germany particularly. Fortunately, the company's performance was
much improved in the second half of its fiscal year, so management now appear
to be resolving the issue.
The top five contributors to performance are shown below.
Country Contribution %
Simcorp Denmark 2.0%
Nemetschek Germany 1.8%
Temenos Switzerland 1.8%
Qualys United States 1.6%
Recordati Italy 1.2%
Source: Northern Trust
Simcorp, the asset management software company, was the biggest contributor to
performance in the year thanks to the share price moving up 38% in one day in
April after the company was bid for by Deutsche Börse. The acquisition was
completed in October.
We found that several companies whose share prices had been weak in 2022,
despite the underlying businesses continuing to perform well, saw their price
rebound in 2023. Nemetschek, the construction and media software company, up
66%, and Qualys, the cybersecurity software company, up 75%, were both
examples of this.
Temenos, the bank software provider, is a company which did not perform as
expected in 2022 but where fundamentals improved in 2023 after the CEO was
replaced by the Executive Chairman. Things are now starting to move further in
the right direction, both in the terms of the new contracts being signed with
large international bank customers, and the underlying operating metrics of
the business, including cash flow conversion.
Recordati's share price rose steadily through the year, with the healthcare
company posting double digit organic sales and profit growth, with improvement
in both its rare disease and primary care drugs. This was bolstered by the
acquisition of commercialisation rights for two urology drugs from GSK. It now
expects 2023 results to come at the high end of its original guidance range,
and to exceed the mid term targets it previously disclosed.
An honourable mention also goes to Verisk, just outside the list, as it is an
interesting example of a company with an attractive core business, in this
case insurance data analytics, surrounded by much poorer performing ancillary
divisions (often built up, as it was in this case, through acquisition). 2022
was the year when management finally decided to sell the underperforming
businesses, leaving shareholders with a much higher quality asset by the end
of 2023. The market rewarded this action with a rerating in the company's
valuation over the course of the year.
The positioning of the fund 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 1967 - our
smaller companies are far from being deemed 'start-ups'.
Sector 31 December 2023 31 December 2022
(%) (%)
Industrials 36% 23%
Information Technology 28% 38%
Healthcare 12% 15%
Consumer Discretionary 10% 13%
Consumer Staples 8% 4%
Financials 3% 3%
Materials 2% -
Communication Services - 3%
Cash 1% 1%
Source: Northern Trust
The changes are immediately obvious, with Information Technology for the first
time since inception no longer being the largest sector weighting. Instead,
the top position is now occupied by Industrials after the acquisition of Graco
and Exponent, and the re-classification by MSCI of Paycom from Information
Technology to Industrials and Sabre from Information Technology to Consumer.
Healthcare has decreased slightly due to the sale of Masimo while Consumer
Staples has almost doubled in size from the addition of Clorox. The decline of
Communication Services to zero is due to the sale of Rightmove.
Country of Listing 31 December 2023 31 December 2022
(%) (%)
USA 45% 40%
UK 14% 17%
Italy 10% 10%
Switzerland 8% 6%
Germany 7% 6%
Australia 5% 7%
Denmark 4% 8%
Sweden 3% 2%
New Zealand 3% 3%
Cash 1% 1%
Source: Northern Trust
The table above illustrates how the regional exposure in terms of country of
listing has changed over the course of the year. The USA is still the largest
country exposure and has actually increased thanks to the US listed
acquisitions mentioned earlier. The UK exposure is smaller due to the sale of
Rightmove and Domino's Pizza Group, offset by the purchase of Croda. Aside
from the halving of the Danish weighting after Simcorp exited the portfolio,
other differences are somewhat limited, being mostly caused by stock market
movements during the year.
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, North America increased with the new additions, to once more become the
largest exposure, with the decrease in UK and Danish exposure now making
Europe 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 2023 31 December 2022
(%) (%)
North America 41% 36%
Europe 34% 39%
Asia Pacific 19% 19%
Eurasia, Middle East, Africa 4% 4%
Latin America 2% 2%
Source: Fundsmith
We end this year with significant optimism for the future. Not only is
portfolio positioning the best we believe it has ever been, but the subject of
much of my commentary over the last couple of years, the interest rate cycle,
is almost certainly at its peak. The upward movement in interest rates has
been the strongest negative force against the relative performance of small
and mid-cap equities and it is perhaps worth observing that over the two years
since rates started increasing, the MSCI World Small and Mid-cap index has
underperformed the MSCI World Large cap index by over 10%. We wait to see what
effect falling rates might have.
We thank you once more for your support of Smithson and look ahead to a bright
future in the coming years.
Simon Barnard
Fundsmith LLP
Investment Manager
26 February 2024
Investment Portfolio
Investments held as at 31 December 2023
Security Country of Fair value %
incorporation £'000 of investments
Recordati Italy 137,613 5.4
Moncler Italy 115,399 4.5
Temenos Switzerland 112,228 4.4
Diploma UK 104,305 4.1
Verisign USA 103,158 4.1
Geberit Switzerland 101,250 4.0
Fortinet USA 100,558 4.0
Verisk Analytics USA 94,036 3.7
Ambu Denmark 93,674 3.7
Qualys USA 92,780 3.7
Top 10 Investments 1,055,001 41.6
Equifax USA 91,029 3.6
MSCI USA 88,702 3.5
Fevertree Drinks UK 88,231 3.5
Nemetschek Germany 88,105 3.5
Rational Germany 85,968 3.4
Graco USA 79,374 3.1
Fisher & Paykel Healthcare New Zealand 77,700 3.0
Addtech Sweden 74,438 2.9
Sabre USA 74,205 2.9
Domino's Pizza Enterprises Australia 73,423 2.9
Top 20 Investments 1,876,176 73.9
Exponent USA 71,898 2.8
Spirax-Sarco Engineering UK 66,305 2.6
Clorox USA 65,220 2.6
Cognex USA 63,807 2.5
IDEX USA 63,158 2.5
Croda UK 61,340 2.4
Rollins USA 55,985 2.2
Halma UK 53,014 2.1
Technology One Australia 50,111 2.0
IPG Photonics USA 45,142 1.8
Oddity Israel 38,782 1.5
Paycom Software USA 24,706 1.0
HMS Networks AB Sweden 3,309 0.1
Total Investments 2,538,953 100.0
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.
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):
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.
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.
Sustainability and ESG
ESG Integration
Investment process
Smithson Investment Trust 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's
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.
Smithson builds an investable universe of, as we define them, "good
companies". Good companies are those that can generate a sustainably high
return on invested capital over the full business cycle and have the ability
to reinvest these returns to generate consistent growth. As long-term
investors, fully analysing the sustainability of the company's returns and its
growth potential is a central tenet of our research process. Detailed
financial analysis of the business is, of course, a large component of this
assessment, but fully analysing the variety of risks and opportunities posed
by non-financial performance plays an important role. Over-exposure to ESG
risks, such as reputational damage, negative consumer sentiment, fines,
increased taxes or disruption to a company's supply chain can significantly
affect a business's ability to sustain high returns over the long term. Hence,
management teams that allocate capital with the sustainability of long-term
returns in mind, will typically have better performance from an ESG
perspective.
Many of the worst environmentally and socially performing businesses are
automatically excluded from the Smithson investable universe, simply due to
their unsustainable business models. Industries we find to be unable to
sustain a high return on invested capital and are therefore unlikely to invest
in, include oil and gas, energy, metals and mining, utilities, and aerospace
and defence, among others.
Stewardship
Active ownership, or stewardship (see Fundsmith's 2022 Stewardship Report at
www.smithson.co.uk/documents), is also an important component of our risk
management process after we invest in a business. Regularly engaging with
investee companies to promote a long-term mindset for capital allocation and
appropriate controls over ESG related risk is a powerful tool in protecting
the long-term value of our investment. For many companies, improving ESG
performance and minimising the negative impacts they may have on the
environment/society can be a factor in strengthening their business model and
outperforming competition. We use engagement to understand management's
perspective, assess their handling of a variety of issues and to raise
concerns we may have regarding their approach or outcomes, when appropriate.
We also ensure we use our proxy votes to protect and enhance the value of our
investments, supporting or opposing the company when necessary. The investment
management team assess votes and engagements on a case-by-case basis
themselves and don't outsource the decision to other departments or use any
advisory services. We use both engagement and proxy voting to support
decisions that benefit the sustainability of returns and long-term performance
of the business.
This approach is used by all of the strategies Fundsmith operates, and is
described in more detail in the Fundsmith Responsible Investment Policy,
published as part of being a signatory to the UN Principles of Responsible
Investment. (see Fundsmith's Responsible Investment Policy at
www.smithson.co.uk/documents).
During the year to 31 December 2023, 379 votes were cast by the Investment
Manager of which 90% were voted in favour of the resolution and 10% against.
Of the 379 votes cast, 49 related to management remuneration and the
Investment Manager voted against the company management on 51% of these.
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 above 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 in the Annual Report for definitions of these
terms and an explanation of how they are calculated.
Net asset value total return against the comparator index
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 comparator index.
The Company's net asset value per share at 31 December 2023 was 1,598.0p and
it reported a total profit after tax for the year of £293.3 million (2022:
£967.7 million loss), comprising a capital profit of £290.3 million (2022:
£972.0 million loss) and a revenue profit of £3.0 million (2022: revenue
profit of £4.4 million) (see financial statements section). The net asset
value total return for the year to 31 December 2023 was 13.3%(1) and the
annualised net asset return for the period from listing on 19 October 2018 to
31 December 2023 was 9.4%(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 9.1% and 7.7% respectively,
thus the Company outperformed the comparator index by 4.2 percentage points
for the year ended 31 December 2023 and outperformed the Index by
1.7 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.
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.
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 2023 was 8.2%(1) and
the annualised share price total return for the period from listing on 19
October 2018 to 31 December 2023 was 6.9%(1), underperforming the MSCI World
SMID Cap Index comparator index by 0.9 percentage points and 0.8 percentage
points respectively. 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. At the
31 December 2023, the discount of the Company's share price to the net asset
value per share was 11.5%(1), and the average discount to net asset value for
the year to 31 December 2023 was 10.7%. During the year the Company's shares
consistently traded at a discount to the net asset value. 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, the Company repurchased 11.7 million
ordinary shares at an average discount to the prevailing net asset value of
10.8%, for a cost of £159.3 million (see Statement of Change in Equity).
Together, repurchases generated a benefit to net asset value per share of
approximately £18.0 million net of costs. The decision and timing of any
share issuance and/or buy-back is at the discretion of the Board.
The average discount of the Company's share price to net asset value per share
in 2023 of 10.7% was in excess of the 10% threshold requiring the Directors to
consider whether to propose a continuation vote at the Annual General Meeting.
Further information concerning the Board's decision on a continuation vote
is given in the Chairman's Statement.
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.
Expressed as a percentage of average net asset value, the annualised ongoing
charges ratio for the year was 0.9% (2022: 0.9%)(1). 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. 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. 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. A review of the risk
procedures and controls in place at the Investment Manager and other key
service providers is performed. Emerging risks, such as the war in the Middle
East and impact on supply chains from disruption to shipping through the Suez
Canal are 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 Middle East
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 impacts.
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 technical updates on matters such as developments in accounting
standards and regulatory and corporate governance changes and best practice;
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's investment objective may become unattractive to investors or its
investment policy may not be successful in generating returns for investors.
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. Failure to do so may mean the Company becomes unattractive to
investors.
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
33 companies with details of the geographic and sector weightings given in
the Investment Manager's Review.
2. Market risks
Price movements, economic 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 conflicts in Ukraine and Middle East) 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. When selecting or
reviewing investments, the Investment Manager evaluates the prospects and
risks, including climate change risks, that could affect these companies. 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. The Board reviews the performance of the Investment Manager
and Depositary at each quarterly Board meeting and the performance of all key
service providers is reviewed annually by the Management Engagement Committee.
Cyber risk management questions are incorporated in this review to confirm the
existence and application of cyber security controls and procedures. The
Company's key service providers confirm periodically to the Board that they
have in place business continuity plans and procedures to mitigate the impact
on the Company of a disruption in service..
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 Audit 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). 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 Association of Investment Companies Code of Corporate
Governance (the "AIC 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
(http://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 wars in Ukraine and the Middle East, 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 2023 the Company had net assets of £2,552
million of which £2,539 million was held in listed investments and £16.6
million in cash (see Statement of Financial Position). At 31 December 2023,
93.2% of the Company's portfolio could be liquidated within 30 days. The Board
therefore has substantial options to meet the Company's continuing obligations
as well as supporting the Company's buyback programme.
Where the Company's share price trades during a financial year at an average
discount to net asset value of more than 10%, and in circumstances where the
Company was under performing, shareholders would be given the opportunity to
vote against the Company's continuation in its present form. During 2023, the
average discount to net asset value was 10.7%. However, the Directors together
with the Company's advisers and the Investment Manager, have discussed this
and concluded that it would not be appropriate to put a continuation vote to
the AGM for the reasons set out in the Chairman's Statement.
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 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 and Non-financial Disclosures
Engaging with the Company's Stakeholders
The following disclosures are required under section 172 of the Companies Act
2006 "s172") and endorsed by the AIC Code. They describe how the Directors
promoted the success of the Company for the benefit of its members as a whole
and have had regard to the interests of the Company's stakeholders in their
decision making.
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 and regular
engagement enables the Board to consider the potential impact of strategic
decisions on each stakeholder group during the decision-making process.
When 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 community and environment through its
investment activities.
Set out below is an explanation of how the Board approaches stakeholder
engagement: why we engage and how we go about it. Below this table is also a
summary of the material engagements we have had with stakeholders during the
year ended 31 December 2023.
Who? Why? How?
Stakeholder group The benefits of engagement with the Company's Stakeholders How the Company, the Manager and the Company Secretary engage with the
Company's Stakeholders
Investors Regular communication with existing and prospective shareholders ensures that The Chairman, Investment Manager and Broker meet with shareholders on a
the Board is cognisant of investor priorities and addresses any concerns regular basis. The Board also receives written policies on governance and
raised. stewardship from some of its larger investors and, at its quarterly meetings,
receives feedback from the Investment Manager and Broker on meetings they have
Clear communication of the Company's strategy and the performance against the attended with investors. The Directors take into account the proxy voting
Company's objective can help maintain demand for the Company's shares and agencies' guidelines to assess the voting recommendations published to
promote an investor base that is interested in a long-term holding in the shareholders ahead of AGM. This is a helpful tool to understand investors'
Company. views on certain resolutions.
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.
Shareholders are encouraged to attend the Company's AGM where they can
question the Board and its 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.
Shareholders are invited to contact the Chairman, or any other member of the
Board at any time by writing to the Company Secretary. Alternatively, the
Chairman can be emailed at the following address:
smithsonchairman@fundsmith.co.uk. (mailto:smithsonchairman@fundsmith.co.uk)
Investment Manager The Investment Manager is the most significant service provider of the The Board receives regular reports from the Investment Manager, discusses the
Company, and a description of its role can be found in the Report of the portfolio at each Board meeting as well as maintaining a constructive dialogue
Directors in the Annual Report. between meetings. The reports from the Investment Manager include compliance
and risk management reports.
Engagement with the Company's Investment Manager is necessary to review
whether it is achieving the Company's objective and adhering to the Company's A representative of the Investment Manager also attends each quarterly Board
policies and to understand the Company's risks and opportunities. meeting and most ad hoc meetings.
Additionally, the Board holds a strategy session at which the Board and
Investment Manager discuss key issues outside the normal Board reporting
framework.
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 The Board has outsourced all its operations to the Investment Manager and The Board receives regular reporting from key service providers. In addition,
other key service providers such as the fund administrator, depositary and on a periodic basis, key service providers are invited to present at
custodian, registrar, broker and company secretary. To ensure the smooth Management Engagement Committee or Board meetings at which any concerns can be
operation of the Company, the Board engages with such key service providers discussed.
and monitors their performance to ensure they are delivering their services in
line with their contractual obligations. The Board also seeks assurance of high standards of governance from its
service providers including reviewing whether they maintain appropriate
Reporting from the Company's broker, auditor and Company Secretary alerts the disaster recovery plans as well as policies on whistleblowing, tax evasion,
Board to proposed changes in regulations and market practice. This helps the human rights, modern slavery and bribery as part of its service provider
Board plan and manage risks as well as complying with relevant regulations. annual review.
The Management Engagement Committee reviews the performance of service
providers and receives feedback from the Investment Manager and Company
Secretary on their interaction with service providers. The Board periodically
reviews the market rates for services provided, to ensure that the Company
continues to receive high quality services at a competitive cost.
Investee Companies The Investment Manager focuses on investing in those companies it believes can The Investment Manager regularly engages with the management of the investee
compound in value over the long term. companies and updates the Board on the outcome of such engagement at each
Board meeting, along with details of its stewardship responsibilities.
As a long-term investor, engagement with investee companies helps develop a
detailed understanding of how sustainable their business models are and the The Board periodically reviews Fundsmith's policy on Responsible Investment
variety of risks and opportunities that may influence their performance, and its Stewardship reports, both of which can be found on the Company's
including ESG matters and their impact on local communities and the website at www.smithson.co.uk. (http://www.smithson.co.uk/)
environment.
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.
During the year, the Board took account of stakeholder engagement in the
following decision-taking:
· In response to the emergence of the discount, the Chairman,
Investment Manager and Broker discussed the discount management policy with
some of the Company's larger shareholders. Following such meetings, the Board,
in consultation with its advisers increased its rate of buying back shares.
The main aim was to provide increased market liquidity, dampen share price
volatility at the same time as gaining some NAV accretive benefit.
· At the last AGM, one shareholder voted against the reappointment
of the Chairman to note their discontent with the fact that the Board does not
yet have an ethnic minority director. This represented more than 20% of the
votes cast and as a consequence, a consultation exercise was conducted with
some of the larger shareholders. Following the consultation, it was agreed
that greater disclosure regarding the Company's succession planning and
diversity policies would be provided in the annual report. These can be found
in the Corporate Governance Report.
Taskforce for Climate Related Financial Disclosures ("TCFD")
The Company notes the TCFD recommendations on climate related financial
disclosures. The Company is an investment company and, as such, it is exempt
from the Listing Rules requirement to report against the TCFD framework.
Disclosure concerning Greenhouse Gas Emissions ("GHG") for the year ended 31 December 2023
The Company is an investment trust, with neither employees nor premises, nor
has it any financial or operational control of the assets which it owns. It
has no greenhouse gas emissions to report from its operations, nor does it
have responsibility for any other emissions producing sources under the
Companies Act 2006 (Strategic Reports and Directors' Reports) Regulations 2013
or the Companies (Directors' Report) and Limited Liability Partnerships
(Energy and Carbon Report) Regulations 2018, including those within the
Company's underlying investment portfolio.
Consequently, the Company consumed less than 40,000 kWh of energy during the
year in respect of which the Directors' Report is prepared and therefore is
exempt from the disclosures required under the Streamlined Energy and Carbon
Reporting criteria.
Company Culture and Values
Corporate culture for an externally-managed investment trust refers to the
beliefs and behaviours that determine how the Directors interact with one
another and how the Board manages relationships with shareholders and key
service providers, such as the appointed investment manager. The culture is
defined by the values which are set out below. The s172 report included in
this Strategy and Business Review provides further details of how the Board
has operated in this regard.
The Board is mindful that it is overseeing the management of a substantial
investment portfolio on behalf of investors. In many cases, the investment in
the Company may represent a large proportion of an individual's savings. As
all the Directors are invested in the Company, the Directors' interests are
aligned with those of fellow shareholders in this regard.
Our approach to governing the Company is therefore underpinned by our
determination to do the right thing for our shareholders. Key to this is
having a constructive relationship with them, through regular updates,
half-yearly and annual reports, and the opportunity to meet with them at the
Annual General Meeting. We also believe in having strong relationships with
our key service providers, one based on mutual trust and respect, with
constructive challenge when required. Below is a summary of the Board's most
important 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.
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.
Integrity and Ethics
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. (http://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. (http://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.
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 state that 85% of recognised
income should 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.
Strategic Report
The Strategic Report set out in the Annual Report was approved by the Board of
Directors on the 26 February 2024.
On behalf of the Board
Diana Dyer Bartlett
Chairman
26 February 2024
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 United Kingdom adopted international
accounting standards. The financial statements also comply with International
Financial Reporting Standards (IFRSs) as issued by the 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. (http://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 2023; 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
26 February 2024
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 2023 and of its profit 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.
Materiality The materiality that we used in the current year was £25.5m which was
determined on the basis of 1% of net assets as at 31 December 2023.
Scoping Audit work to respond to the risks of material misstatement was 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:
· Obtaining an understanding of relevant controls over management's
process for evaluating the company's ability to continue as a going concern;
· Assessing the controls in place that enable the company to
continue to operate as an Investment Trust;
· Assessing the performance and position of the company, including
its strong cash position, dividend income and management fee expenses;
· Assessing the risks to the investment portfolio of market
altering factors such as inflation, high energy costs and increased interest
rates, by looking at the company's operational impact and business continuity
plans;
· Assessing the company's ability to cover its expenses for the
12-month period from the date of signing the financial statements, including
the ability of the company to exit underperforming investments, if needed; and
· Assessing the appropriateness of the 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 £2,539m as at 31
December 2023 (2022: £2,394m). 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 since investment
return is a key performance indicator for the company.
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 investments key audit matter:
· We obtained an understanding of, and tested, relevant controls
over the valuation and ownership of investments; we relied on these controls
in our audit approach to investment valuation;
· We independently valued 100% of the investment portfolio to the
closing bid prices published by an independent pricing source; and
· We confirmed the ownership of 100% of investments at the
year-end date by obtaining independent third-party confirmations directly from
the custodian.
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 £25.5m (2022: £24.2m)
Basis for determining materiality 1% (2022: 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 increase in
materiality year on year arose principally from the increase 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 2023 audit (2022: 70%). 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. o significant changes in the company's operating environment caused by
the uncertainty and volatility brought about by inflation, high energy costs
and increased 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 £1.3m (2022: £1.2m), 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
In assessing the company's control environment, we considered controls in
place at the company's service organisation which acts as administrator. As
part of this we reviewed the System and Organisation Controls (SOC 1) Report
of the service organisation and have taken a controls reliance approach in
respect of the controls relating to valuation and ownership of investments. We
also reviewed the controls report of the service organisation in respect of
general IT controls. Further, we performed understanding of relevant business
processes and 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 on in the Strategic Report. As a part of our audit, we held
discussions to understand the process of identifying climate-related risks,
management's 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.
(http://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, the directors and the Audit
Committee about their own identification and assessment of the risks of
irregularities, including those that are specific to the company's sector;
· 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 and any potential
indicators of fraud.
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, tax
legislation, and Association of Investment Companies SORP.
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. This included the requirements of the United Kingdom's Financial
Conduct Authority ("FCA"), Alternative Investment Fund Managers Directive, and
ESG Sourcebook.
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 that
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; 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 matter.
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 5 years, covering the years ending 31 December 2019 to 31 December
2023.
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
26 February 2024
Statement of Comprehensive Income
For the year ended For the year ended
31 December 2023
31 December 2022
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 31,116 - 31,116 31,341 - 31,341
Gains/(losses) on investments held at fair value through profit or loss 9 - 291,600 291,600 - (970,879) (970,879)
Foreign exchange (losses)/gains (136) (656) (792) 147 (399) (252)
Investment management fees 4 (20,280) - (20,280) (21,998) - (21,998)
Other expenses and transaction costs 5 (1,532) (650) (2,182) (1,463) (743) (2,206)
Profit/(loss) before tax 9,168 290,294 299,462 8,027 (972,021) (963,994)
Tax 6 (6,144) - (6,144) (3,670) - (3,670)
Profit/(loss) for the year 3,024 290,294 293,318 4,357 (972,021) (967,664)
Return/(loss) per share (basic and diluted) (p) 7 1.82 175.02 176.84 2.49 (555.60) (553.11)
The Company does not have any income or expenses which are not included in the
return/(loss) for the year.
All of the return/(loss) 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 2023 31 December 2022
Notes £'000 £'000
Non-current assets
Investments held at fair value through profit or loss 9 2,538,953 2,393,848
Current assets
Trade and other receivables 10 1,851 3,853
Cash and cash equivalents 16,579 24,589
18,430 28,442
Total assets 2,557,383 2,422,290
Current liabilities
Trade and other payables 11 (5,445) (4,323)
Total assets less current liabilities 2,551,938 2,417,967
Equity attributable to equity shareholders
Share capital 12 1,771 1,771
Share premium 13 1,719,487 2,219,487
Capital reserve 834,305 203,358
Revenue reserve (3,625) (6,649)
Total equity 2,551,938 2,417,967
Net asset value per share (p) 14 1,598.0 1,410.7
The financial statements were approved by the Board on 26 February 2024 and
were signed on its behalf by:
Diana Dyer Bartlett
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 2023
Share Share Capital Revenue
Capital Premium Reserve* Reserve* Total
Notes £'000 £'000 £'000 £'000 £'000
Balance at 1 January 2023 1,771 2,219,487 203,358 (6,649) 2,417,967
Ordinary shares bought back and held in treasury - - (158,506) - (158,506)
Costs on buybacks - - (841) - (841)
Transfer of share premium(#) - (500,000) 500,000 - -
Profit for the year - - 290,294 3,024 293,318
Balance at 31 December 2023 12 1,771 1,719,487 834,305 (3,625) 2,551,938
(#) On 28 February 2023, High Court approval was obtained to reduce the
Company's share premium by £500 million. The capital reduction, resulted in a
corresponding increase in the Company's distributable reserves.
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
* 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 2023 31 December 2022
Notes £'000 £'000
Operating activities
Profit/(loss) before tax 299,462 (963,994)
Adjustments for:
(Gains)/losses on investments held at
fair value through profit or loss 9 (291,600) 970,879
(Increase)/decrease in receivables (90) 25
Decrease in payables (70) (1,175)
Overseas taxation (4,334) (4,584)
Net cash generated from operating activities 3,368 1,151
Investing activities
Purchases of investments 9,11 (368,464) (651,473)
Sale of investments 9,10 514,316 624,269
Net cash generated from/(used in) investing activities 145,852 (27,204)
Financing activities
Proceeds from issue of new shares 12 - 93,104
Issue costs relating to new shares 12 - (560)
Purchase of shares held in treasury 12 (156,389) (73,604)
Costs relating to buy backs 12 (841) (379)
Net cash (used in)/generated from financing activities (157,230) 18,561
Net decrease in cash and cash equivalents (8,010) (7,492)
Cash and cash equivalents at start of the year 24,589 32,081
Cash and cash equivalents at end of the year 15 16,579 24,589
Comprised of:
Cash at bank 16,579 24,589
Dividends and interest received in cash during the year amounted to
£30,292,000 and £755,000 (2022: £31,348,000 and £56,000), 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 at their ex-dividend date. 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 arises 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.
· Amendment to IFRS 16 'Leases on sale and leaseback' (effective for
accounting periods beginning on or after 1 January 2024).
· Amendment to IAS 1 'Non-current liabilities with covenants'
(effective for accounting periods beginning on or after 1 January 2024).
· Amendment to IAS 7 and IFRS 7 'Supplier finance' (effective for
accounting periods on or after 1 January 2024 - with transitional reliefs in
the first year).
· Amendments to IAS 21 'Lack of Exchangeability' (effective for
accounting periods on or after 1 January 2024 - early adoption is available).
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.
In the current financial year the Company has applied the following
interpretations and amendments to standards:
· IFRS 17, Amendments to IAS 8, IAS 12, IAS 1 and IFRS Practice
Statement 2 (effective for accounting periods beginning on or after 1 January
2023).
There is no material impact on the financial statements or the amounts
reported from the adoption of these amendments to the standards.
2. Dividend income
2023 2022
£'000 £'000
UK dividends 7,626 6,603
UK dividends - special - 3,324
Overseas dividends 20,843 16,921
Overseas dividends - special 1,836 4,437
Bank interest 811 56
Total 31,116 31,341
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
2023 2022
£'000 £'000
Investment management fee 20,280 21,998
As at 31 December 2023, an amount of £1,599,000 (2022: £1,659,000) was
payable to the Investment Manager. Details of the terms of the Investment
Management Agreement are provided in the Annual Report.
5. Other expenses
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Transaction costs on investments held at fair value through profit or loss - 650 650 - 743 743
Directors' fees 150 - - 135 - 135
Employer national insurance contributions 13 - 13 - - -
Auditor fees in relation to audit 48 - 48 47 - 47
Tax compliance fee 9 - 9 (11) - (11)
Registrar fees 38 - 38 44 - 44
Broker fees 40 - 40 40 - 40
Company secretarial fees 129 - 129 93 - 93
Custody fees 179 - 179 190 - 190
Depositary fees 235 - 235 244 - 244
Postage and printing 28 - 28 30 - 30
Legal fees 38 - 38 (23) - (23)
Fund administration fees 364 - 364 360 - 360
Other expenses* 261 - 261 314 - 314
Total Expenses 1,532 650 2,182 1,463 743 2,206
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 £505,000 (2022:
£538,000) and on sales amounted to £145,000 (2022: £205,000).
No non-audit fees were paid during the year to Deloitte LLP by the Company
(2022: nil).
6. Taxation
(a) Analysis of tax charge in the year
2023 2022
Revenue £'000 Capital £'000 Total Revenue £'000 Capital £'000 Total
£'000 £'000
Taxation on ordinary activities
Irrecoverable overseas withholding tax 6,144 - 6,144 3,670 - 3,670
Total tax 6,144 - 6,144 3,670 - 3,670
(b) The tax charge for the year is lower than the standard rate of corporation
tax in the UK of 23.52%. The differences are explained below:
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Profit/(loss) before tax 9,168 290,294 299,462 8,027 (972,021) (963,994)
Corporation tax at standard rate of 23.52%* 2,156 68,277 70,433 1,525 (184,684) (183,159)
Effects of non taxable items:
UK dividends (1,794) - (1,794) (1,886) - (1,886)
Overseas dividends (5,334) - (5,334) (4,058) - (4,058)
Interest income (191) - (191) (11) - (11)
Net (gains)/losses on investments held at fair value through profit or loss - (68,584) (68,584) - 184,467 184,467
Expenses and foreign exchange losses/(gains) 32 307 339 (28) 217 189
Deferred tax asset not recognised 5,131 - 5,131 4,458 - 4,458
Total corporation tax - - - - - -
Irrecoverable overseas withholding tax 6,144 - 6,144 3,670 - 3,670
Total tax 6,144 - 6,144 3,670 - 3,670
* With effect from 1 April 2023, the main rate of corporation tax increased
from 19% to 25%, therefore the hybrid rate of 23.52% has been used.
As at 31 December 2023, the Company had unrecognised tax losses of £104.2
million (2022: £82.4 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:
2023 2022
Revenue Capital Total Revenue Capital Total
Profit/(loss) for the year (£'000) 3,024 290,294 293,318 4,357 (972,021) (967,664)
Return/(loss) per ordinary share (p) 1.82 175.02 176.84 2.49 (555.60) (553.11)
Return per share is calculated based on returns for the year and the weighted
average number of 165,863,972 ordinary shares in issue from 1 January 2023 to
31 December 2023 (2022: 174,950,862).
8. Dividends
There are no dividends proposed, declared or payable for the year (2022: nil).
9. Investments held at fair value through profit or loss
All gains and losses arise on investments designated as fair value through
profit or loss which is how the investments are classified upon initial
recognition.
As at 31 December 2023 2022
£'000 £'000
Opening book cost 2,353,438 2,162,638
Opening investment holding gains 40,410 1,176,512
Opening fair value at 1 January 2,393,848 3,339,150
Purchases at cost 367,539 651,607
Sales - proceeds (514,034) (626,030)
Gains/(losses) on investments 291,600 (970,879)
Closing fair value at 31 December 2,538,953 2,393,848
Closing book cost at 31 December 2,232,394 2,353,438
Closing unrealised gains at 31 December 306,559 40,410
Valuation at 31 December 2,538,953 2,393,848
The Company received £514,034,000 (2022: £626,030,000) excluding transaction
costs from investments sold in the year. The book cost of the investments when
they were purchased was £489,233,000 (2022: £461,550,000) 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
2023
As at 31 December Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Investments held at fair value through profit or loss 2,538,953 - - 2,538,953
Total 2,538,953 - - 2,538,953
2022
As at 31 December Level 1 Level 2 Level 3 Total
£'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
10. Trade and other receivables
As at 31 December 2023 2022
£'000 £'000
Accrued income 251 182
Overseas tax recoverable - 1,810
Securities sold receivable 1,479 1,761
Other receivables 121 100
1,851 3,853
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. Trade and other payables
As at 31 December 2023 2022
£'000 £'000
Securities purchased payable 1,474 2,399
Investment management fee payable 1,599 1,659
Payable on repurchase of ordinary shares into treasury 2,117 -
Other payables 255 265
5,445 4,323
12. Share capital
As at 31 December 2023 2022
Ordinary Treasury Total Nominal Ordinary Treasury Total Nominal
Shares Number Shares Number Shares Number Value Shares Number Shares Number Shares Number Value
£'000 £'000
Issued, allotted and fully paid (ordinary shares of £0.01)
Ordinary shares in issue at 1 January 171,407,958 5,700,000 177,107,958 1,771 171,697,958 - 171,697,958 1,717
Ordinary shares issued - - - - 5,410,000 - 5,410,000 54
Ordinary shares bought back and held in treasury (11,715,000) 11,715,000 - - (5,700,000) 5,700,000 - -
159,692,958 17,415,000 177,107,958 1,771 171,407,958 5,700,000 177,107,958 1,771
During the year ended 31 December 2023, the Company issued no shares (2022:
5,410,000 shares of £0.01 each for a net consideration of £92,544,000).
During the year ended 31 December 2023, the Company bought back to hold in
treasury 11,715,000 shares (31 December 2022: 5,700,000) at an aggregate cost
of £159,347,000 (31 December 2022: £73,983,000). At the year end, the
Company held 17,415,000 (31 December 2022: 5,700,000) 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
As at 31 December 2023 2022
£'000 £'000
Balance at 1 January 2,219,487 2,126,997
Issue of new shares on secondary market - 93,050
Costs on new share issues on secondary market - (560)
Transfer of share premium (500,000) -
1,719,487 2,219,487
On 28 February 2023, High Court approval was obtained to reduce the Company's
share premium by £500 million. The capital reduction resulted in a
corresponding increase in the Company's distributable reserves.
14. Net asset value per share
As at 31 December 2023 2022
Net asset value £2,551,938,000 £2,417,967,000
Shares in issue (excluding shares held in treasury) 159,692,958 171,407,958
Net asset value per ordinary share 1,598.0p 1,410.7
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:
As at 31 December 2023 2022
£'000 £'000
Cash and cash equivalents 16,579 24,589
Receivables 1,851 3,853
18,430 28,442
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 2023 31 December 2022
Investments Cash Receivables Payables Total Investments Cash Receivables Payables Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Australian Dollar 123,534 - - - 123,534 157,673 - 1,761 (1,761) 157,673
Danish Krone 93,674 - - - 93,674 202,662 507 323 (2,399) 201,093
Euro 427,085 - - - 427,085 387,099 - 346 - 387,445
New Zealand 77,700 - - - 77,700 68,459 - - - 68,459
Dollar
Swedish Krona 77,746 - 1,342 (1,475) 77,613 51,686 - 156 - 51,842
Swiss Franc 213,480 - - - 213,480 149,073 - 985 - 150,058
US Dollar 1,152,540 114 1,479 (1,347) 1,152,786 958,501 110 - - 958,611
2,165,759 114 2,821 (2,822) 2,165,872 1,975,153 617 3,571 (4,160) 1,975,181
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 2023, an exchange rate move of +/-5% (2022: +/-5%) against
sterling which is a reasonable approximation of possible changes would have
increased or decreased total net assets and total return by £108,294,000
(2022: £98,759,000).
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 £16,579,000 (2022: £24,589,000) 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 2023 the interest rate was 2.8% (2022: 1.4%).
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
£83,000 (2022: £123,000). 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% (2022: 20%) at 31 December 2023,
the impact on profit or loss and net assets would have been negative
£507,790,600 (2022: £478,769,600). An increase of 20% (2022: 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.
As at 31 December 2023 2022
£'000 £'000
Assets at fair value through profit or loss 2,538,953 2,393,848
Cash and cash equivalents 16,579 24,589
Investment income receivable 251 182
Securities sold receivable 1,479 1,761
Other receivables 121 100
Payables (5,445) (4,323)
2,551,938 2,416,157
Non-financial assets held at fair value
Overseas tax recoverable - 1,810
Net assets 2,551,938 2,417,967
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 2023 held
£16,579,000 (2022: £24,589,000) 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 £2,551,938,000 (2022:
£2,417,967,000).
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 2023 there were no contingent liabilities or capital
commitments (2022: 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 £150,000 (2022:
£137,500), 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 2,710,915
(2022: 2,919,112) shares in the Company amounting to 1.7% (2022: 1.7%) of the
issued share capital of the Company as at 31 December 2023.
18. Events after the reporting period
Since the year end and up to 22 February 2024 (the latest practicable date
before publication of the Annual Report), the Company has bought back to hold
in treasury 1,650,000 ordinary shares at an aggregate cost of £23.0 million.
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 2023, 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
2023, 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 2023 was approved by the
Board on 26 February 2024. 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 25 April 2024 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.
27 February 2024
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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