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 NAV1
|
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
|
|
%
change2
|
%
change2
|
%
change2
|
NAV
total return per share1
|
+13.3%
|
-28.1%
|
+59.8
|
Share price total return1
|
+8.2%
|
-35.2%
|
+41.5
|
Comparator index total return3
|
+9.1%
|
-8.7%
|
+47.2
|
Ongoing charges ratio1
|
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
NAV1
|
(11.5)%
|
(7.3)%
|
3.0%
|
3.7%
|
3.4%
|
Year ended
31 December
|
|
|
|
|
|
NAV total
return
|
|
|
|
|
|
per
share1
|
+13.3%
|
-28.1%
|
+18.9%
|
+31.4%
|
+33.2%
|
Share price total
return1
|
+8.2%
|
-35.2%
|
+18.1%
|
+31.7%
|
+29.8%
|
Comparator index
total
|
|
|
|
|
|
return3
|
+9.1%
|
-8.7%
|
+17.8%
|
+12.2%
|
+21.9%
|
Ongoing charges
ratio1
|
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.
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.
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
Return5
1 January
2023
to 31 December
2023
%
|
Launch to 31 December
2023
|
Cumulative
%
|
Annualised
%
|
Smithson NAV1
|
+13.3
|
+59.8
|
+9.4
|
Smithson Share Price
|
+8.2
|
+41.5
|
+6.9
|
Small and Midcap
Equities2
|
+9.1
|
+47.2
|
+7.7
|
UK Bonds3
|
+5.6
|
-4.9
|
-1.0
|
Cash4
|
+4.6
|
+7.5
|
+1.4
|
1 Source: Bloomberg, starting NAV 1000.
2 MSCI World SMID Cap Index, £ Net source:
www.msci.com.
3 Bloomberg/Barclays Bond Indices UK Govt 5-10 yr, source:
Bloomberg.
4 Month £ Interest Rate source: Bloomberg.
5 Alternative Performance Measure (see 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
sector1. 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
Investment Trust
|
MSCI WSMID
|
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
incorporation
|
Fair value
£'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
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 Board is cognisant of
investor priorities and addresses any concerns raised.
Clear communication of the Company's
strategy and the performance against the Company's objective can
help maintain demand for the Company's shares and promote an
investor base that is interested in a long-term holding in the
Company.
|
The Chairman, Investment Manager and
Broker meet with shareholders on a regular basis. The Board also
receives written policies on governance and stewardship from some
of its larger investors and, at its quarterly meetings, receives
feedback from the Investment Manager and Broker on meetings they
have attended with investors. The Directors take into account the
proxy voting agencies' guidelines to assess the voting
recommendations published to shareholders ahead of AGM. This is a
helpful tool to understand investors' 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.
|
Investment Manager
|
The Investment Manager is the most
significant service provider of the Company, and a description of
its role can be found in the Report of the Directors in the Annual
Report.
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 policies and
to understand the Company's risks and opportunities.
|
The Board receives regular reports
from the Investment Manager, discusses the portfolio at each Board
meeting as well as maintaining a constructive dialogue between
meetings. The reports from the Investment Manager include
compliance and risk management reports.
A representative of the Investment
Manager also attends each quarterly Board 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 other key service
providers such as the fund administrator, depositary and custodian,
registrar, broker and company secretary. To ensure the smooth
operation of the Company, the Board engages with such key service
providers and monitors their performance to ensure they are
delivering their services in line with their contractual
obligations.
Reporting from the Company's broker,
auditor and Company Secretary alerts the Board to proposed changes
in regulations and market practice. This helps the Board plan and
manage risks as well as complying with relevant
regulations.
|
The Board receives regular reporting
from key service providers. In addition, on a periodic basis, key
service providers are invited to present at Management Engagement
Committee or Board meetings at which any concerns can be
discussed.
The Board also seeks assurance of
high standards of governance from its service providers including
reviewing whether they maintain appropriate disaster recovery plans
as well as policies on whistleblowing, tax evasion, human rights,
modern slavery and bribery as part of its service provider 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 compound in value over
the long term.
As a long-term investor, engagement
with investee companies helps develop a detailed understanding of
how sustainable their business models are and the variety of risks
and opportunities that may influence their performance, including
ESG matters and their impact on local communities and the
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.
|
The Investment Manager regularly
engages with the management of the investee companies and updates
the Board on the outcome of such engagement at each Board meeting,
along with details of its stewardship responsibilities.
The Board periodically reviews
Fundsmith's policy on Responsible Investment and its Stewardship
reports, both of which can be found on the Company's website
at www.smithson.co.uk.
|
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.
Prevention of the facilitation of
tax evasion
In response to the Criminal Finances
Act 2017, the Board has adopted a zero-tolerance approach to the
criminal facilitation of tax evasion. A summary of the Company's
policy can be found on the Company's website at
www.smithson.co.uk.
Employees, human rights and
community issues
The Board recognises the requirement
to provide information about employees, human rights and community
issues. As the Company has no employees, all its Directors are
non-executive and all its functions are outsourced, there are no
disclosures to be made in respect of employees, human rights and
community issues. As at the date of this report the Company had
four Directors, of whom two are male and two are female. The
Board's policy on diversity is contained in the Corporate
Governance Report of the Annual Report.
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.
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.
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
31 December 2023
|
For the year ended
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
£'000
|
2022
£'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
£'000
|
2022
£'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
£'000
|
Revenue £'000
|
Capital £'000
|
Total
£'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
£'000
|
Capital
£'000
|
Total
£'000
|
Revenue
£'000
|
Capital
£'000
|
Total
£'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
£'000
|
2022
£'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
£'000
|
Level 2
£'000
|
Level 3
£'000
|
Total
£'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
£'000
|
Level 2
£'000
|
Level 3
£'000
|
Total
£'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
£'000
|
2022
£'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
£'000
|
2022
£'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
Shares Number
|
Treasury
Shares Number
|
Total
Shares Number
|
Nominal
Value
£'000
|
Ordinary
Shares Number
|
Treasury
Shares Number
|
Total
Shares Number
|
Nominal
Value
£'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
£'000
|
2022
£'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
£'000
|
2022
£'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
£'000
|
Cash
£'000
|
Receivables
£'000
|
Payables
£'000
|
Total
£'000
|
Investments
£'000
|
Cash
£'000
|
Receivables
£'000
|
Payables
£'000
|
Total
£'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
£'000
|
2022
£'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