For a fund built around finding the world’s best small and mid-cap companies, Simon Barnard is refreshingly candid about how little he wants to do once he’s found them. The portfolio manager of the Smithson Equity Fund, who joined Fundsmith in 2017 to launch the Smithson Investment Trust – which converted to the Smithson Equity Fund earlier this year – after fourteen years at a large US asset manager, describes a philosophy that sounds almost too simple: buy good companies, don’t overpay for them, and then exercise conviction so their value can compound over time.
The strategy sounds simple, but Barnard is quick to note that executing it consistently is the hard part.
The first task is finding companies worth holding for the very long term. These are businesses that sustain high returns on invested capital, generate strong free cash flow, and are exposed to a durable source of growth.
He has a particular focus on companies with strong competitive advantages in small but growing niches, the kind of specialists that can see off competitors and grow as their corner of the market expands around them.
Everything begins with the fund’s curated investable universe. This list was built over roughly eight years of deep research into the best companies they have come across anywhere in the global developed markets, with the Smithson team trawling through thousands of small companies in search of the best ones that fit its strict criteria.
Highly curated universe
Smithson’s investable universe currently numbers around 95 names, and the portfolio is drawn exclusively from it. Smithson works from this tightly screened shortlist, which Barnard sees as one of the fund’s defining features. This is indeed a concise universe from which Smithson constructs a concentrated portfolio of 25 to 40 stocks, given that some comparative funds can hold 50+ stocks in their portfolios.
Getting a name from the universe into the portfolio is largely a question of price. Smithson tends to wait for these companies to become attractively valued, and that opportunity usually arrives in one of two ways.
Most businesses, even those that aren’t obviously cyclical, have some degree of cyclicality, and the team tries to buy at the lower end of the cycle.
Barnard’s personal favourite, though, is the short-term glitch: a genuinely high-quality company knocked off course by a temporary problem that weighs on its earnings or its near-term prospects and, most critically, its valuation.
Equifax is an example. The US credit bureau was hit by an enormous cyberattack in 2017 that exposed more than 200 million consumer records, and its share price declined accordingly. Rather than rushing in, Smithson spent about a year watching how management responded. The conclusion was that Equifax was likely to emerge as one of the most cyber-secure credit bureaus around, making the episode a short-term glitch rather than a long-term threat. The fund bought Equifax in 2018 and held until 2025, by which point the shares had compounded through both earnings growth and a re-rating.
The geographic split – around 50% in the US, just over 40% in Europe and roughly 10% in Asia – is a consequence of this stock-by-stock approach rather than managers taking a macro position.
Barnard emphasises that the weightings are entirely the result of bottom-up research. The fund simply goes where the best opportunities happen to be, with some top-down work reserved for managing position sizes and overall risk control. Notably, the fund’s current investments are at their lowest portfolio-level forward P/E ratio in ten years
Portfolio positioning
Focusing on the US small- and midcap space has been a good place to be in recent years, especially given the level of selectivity employed by Smithson. This is demonstrated by an investment in Vertiv, which became an ‘AI stock’ through its AI infrastructure products, returning the fund several multiples of its original investment. However, investment in Vertiv was not an attempt to jump on the AI bandwagon; it was the result of deep research into an ‘under the radar’ company set to benefit from booming spending in the sector.
Other current top holdings that illustrate the house style well include HMS Networks, a Swedish business that makes the hardware that lets machinery in factories and commercial buildings talk to each other and to central systems – a quiet enabler of the data economy and industrial automation.
Melexis, based in Belgium, produces semiconductor sensors mainly for cars and is now redesigning its chips for humanoid robots; unlike many loss-making peers in that field, it already runs a 20% operating margin. A more recent purchase, Switzerland’s Belimo, makes the actuators that open and close valves in heating and cooling systems and has carved out a number-one position in liquid cooling for data centres, helping to push revenue growth to around 20% and margins above 21%.
What ties it all together is a refusal to invest based on macroeconomic forecasts. Smithson’s companies have gross margins of around 65%, giving them the pricing power to pass on rising input costs and ride out inflation should it occur.
Although the fund has been positioned in some of the most exciting themes, Barnard’s enthusiasm lies in their underlying investment approach: mid-caps that have become cheaper over the last few years, both absolutely and relative to large caps, yet have maintained their fast earnings growth.
While the fund operates a bottom-up approach, there is currently deep value in the mid-cap area of the market compared to large caps, with mid-caps trading at a discount to large caps not seen since the financial crisis.
This is largely due to the outsized performance of US mega caps, which is making the mid-cap space a rich hunting ground for investors seeking relative value.
Barnard’s approach of looking for a glitch may also come into play here. There is a long-term trend of mid-caps outperforming large caps, and the dislocation we see currently favours just the space the Smithson Equity Fund invests in.