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Steven Chen
Steven Chen
Articles (206)  | Author's Website |

Takeaways From Smithson's 2020 Annual Meeting

The portfolio manager shared his candid perspective on investing in small- and mid-caps

Value investing guru Mohnish Pabrai (Trades, Portfolio) advocates cloning shamelessly. The logic behind this makes perfect sense – what can go wrong with building your portfolio based on all the hard work from some of the wisest people on the planet that comes free of charge to you?

In this regard, we think that investors, especially individual ones, should be selective and make sure to leverage the size advantage, if any. For instance, Warren Buffett (Trades, Portfolio) has to handle several hundred billion USD in assets (including more than $100 billion in cash at the moment) via not only sizable equity stakes but also through controlling ownership and even acquisitions. Terry Smith invests his Fundsmith Equity Fund of around GBP 20 billion mainly in large-caps. Indeed, handling large or mega sum of money is quite different from investing with a smaller amount.

This does not mean that large-cap businesses like Coca Cola (NYSE:KO) and Microsoft (NASDAQ:MSFT) are inferior as investments. However, it implies that most individual investors often have a larger investable universe to deploy their capital without sacrificing quality.

This is precisely why we think that Smithson’s portfolio can be quite a useful reference. The investment trust employs the same strategy as Fundsmith, its parent, but it applies it to the small- and mid-cap space only.

The fund is over one year old now. Last month, its portfolio manager, Simon Barnard, held the first annual meeting and shared his candid perspective on investing, industries and some of the Smithson’s holdings, including many of the quality names that we believe alpha-seeking investors should consider owning.


Barnard appreciates the subscription model at Rightmove (LSE:RMV), which provides stable revenue through its growth strategy of selling more digital products, and super-normal profitability, reflected by a nearly 70% operating margin. He thinks the market misunderstands the name, as its business is not so exposed to the housing market in the short run.


Barnard thinks Halma (LSE:HLMA) is a good acquirer, which is rare in the corporate world. We checked the company’s financials for the past decade, and as you can see below, the return on capital remained high, while the annual free cash flow more than quadrupled.

In the meantime, we think that investors should always be cautious (or even skeptical) towards any inorganic growth strategy unless a solid long-time track record can exemplify superior acquisition skill.


Barnard expresses his concern about the high valuation of Paycom (NYSE:PAYC) while acknowledging its business value of saving costs for clients. The shares traded at a less than 2% free cash flow yield most of the time over the past three years (see below).

CDK Global

The fund sold CDK Global (NASDAQ:CDK) over the period. Barnard attributes the disposal to the indication of poor capital allocation. In detail, he pointed to the new CEO’s decision of selling fast-growing digital marketing business and previous record of some quite expensive technology acquisitions, as well as his preference for the company to utilize the attractive valuation and continue share buybacks

Check Point

According to Barnard, the management at Check Point (NASDAQ:CHKP) attributes the slow-down in sales to the issue of salesforce instead of its product. The fund manager would like to give another 12 months and keep the situation monitored. Per the chart below, the top-line growth at the Israeli cybersecurity company fell to a low-single-digit rate in recent years.

Consumer goods vs. industrials

Barnard thinks that high-quality consumer companies tend to get large over time. They are either old companies or are being consolidated. Therefore, he feels it is difficult to find small-cap consumer businesses that fit his investment criteria. Fevertree Drinks (LSE:FEVR) is one of the very few exceptions in his portfolio.

On the contrary, the fund manager believes that small industrials are generally more attractive than large ones, as the former group can grow quickly in their respective market niches even during market downturns and is less prone to economic cycles. This reminds us of our favorite industrial company, Graco (GGG), the mid-cap market leader in the niche of handling fluids.


In light of the ongoing Covid-19 crisis, Barnard emphasizes the significance of owning quality businesses that produce reliable cash flow and have a strong balance sheet. Although admitting that he had no concrete number yet, he believes that these companies can possess even stronger positions once we start to come out of the crisis.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Rightmove and Check Point.

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About the author:

Steven Chen
Steven CHEN is a quality-focused, business-perspective investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected], LinkedIn, or WeChat (ID: LSCHEN2005).

Also, check out his column at Smartkarma on the Asian market - www.smartkarma.com/profiles/steven-chen

Visit Steven Chen's Website

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