An investment trust operated by star fund manager Terry Smith’s Fundsmith firm lamented the drawing power of blockbuster US tech stocks over smaller investment opportunities in a shareholder update published on Monday.
Simon Barnard, the investment manager at Fundsmith’s Smithson Investment Trust plc, conceded that his fund’s performance has been “like watching paint dry” in 2024.
“As has happened in the past, large and 'glamourous' stocks have outperformed strongly this year, while small and medium-sized companies as an asset class have struggled, and we only need to look at certain individual companies to get a sense of the scale of this issue,” said Barnard in a trading update.
Singling out Nvidia Corp, which has emerged as Wall Street’s number one play in the artificial intelligence sector, Barnard said it was “not an exaggeration to say that the level of asset flows currently being attracted to certain US large cap stocks is potentially sucking the air out of entire asset classes”.
He continued: “This cannot go on forever, and it reminds me of a quote from veteran small-cap manager, Ralph Wanger, who, suffering from the same issue, said ‘There is only one stock market, not two, and the market will soon shed a tier’.
Smithson’s discount to net asset value (NAV) widened to 12.2% in the first half of 2024, from 11.1% last year, while total returns per share were negative 1.8%.
As Smithson’s chair Diana Dyer Bartlett rightfully pointed out, NAV discounts are nearly universal across the investment trust sector right now.
“To put the scale of the problem into context, at the end of June 2024, according to the Association of Investment Companies' statistics, some 94% of investment trusts were trading at a discount and the average discount across the industry on 30 June 2024, excluding 3i, was 15%,” said Bartlett.
Smithson’s total interim losses after tax for the half year came to £71 million, comprising a capital loss of £77 million partially offset by a revenue profit of £6 million.