SMT Rebalance - Options?

[Runt24]

I am a moderately inactive investor that regularly visits these boards, attracted by what their contributors can teach me, and having gravitated towards them following the demise of the Boards on Motley Fool, which was always a wonderful resource.

Twenty years ago, and over a period of about four years, I invested in a range of IT's; Alliance (and Second Alliance), Brunner, Foreign and Colonial and Scottish Mortgage. Five years ago, I sold the Brunner for City of London and started to make small monthly contributions to RIT and Finsbury Growth and Income. Dividends from Alliance were redirected in to Blackrock Smaller Companies.

Visiting the portfolio for the first time for some while, the relative performances of the portfolio has drastically affected the weightings over this 20 year period. Scottish Mortgage now accounts for 37.5% by value, Alliance is 26%, F&C 14% RIT is 8% (and will continue to grow with the monthly contributions) and the remainder sit at about the 5% mark.

This has presented me with the dilemma of whether I should rebalance, and if I were to do so, with what, or whether I should leave it all alone, and continue to ride the main winner (SMT) for another 20 years?

In the 24 hours that have passed since first perusal I wondered whether I might look to Fundsmith to reduce my SMT reliance and redirect some of the proceeds from Alliance in to BG Shin Nippon and Martin Currie Global. There doesn’t seem to be much out there that can provide me with the same returns as SMT, but Fundsmith is one of them. Both Shin Nippon and Martin Currie appear to have recently acquired new managers and neither seems the worse for it. Shin Nippon is currently on a premium which is lower than normal, and Martin Currie a slight discount. I quite like the fact that Osmani has invested in companies that supply the likes of Tesla rather than Tesla itself (something that has increased my nervousness towards SMT) and I THINK that Japanese markets can be used defensively as a counterweight to others. Being fairly risk averse I always thought international generalist trusts the best option, but by having quite a few of them, my risk might not be as well spread as it would be if I invested money in other things?

I wondered whether anyone could please offer advice on the ideas of a rebalance, and secondly on the proposed IT’s (or suitable alternatives) themselves.

Perhaps I should return to a passive stance of allowing the portfolio to find its own way?

Thank you to everyone for contributing to an interesting and enlightening community - keep up the good work - long may it continue.

Regards,

Runt.

[Dod101]

Very interesting dilemma. Well done for leaving the portfolio alone and see what has happened! City of London seems an odd choice to sit amongst what are mainly growth ITs but never mind. Personally I do not like country specific ITs very much although I think that BG Shin Nippon is a good Japanese Trust. (BG again of course alongside SMT)

You appear to have 7 ITs currently and all with different characteristics so I do not think there is any real need to go beyond those, but if you want to introduce another I would be more inclined towards Murray International say. They have not done much in the last few years but will I think do well in the long run. I do not know anything of Martin Currie Global but if you are happy with their performance then why not?

To answer your question. Yes I think you should trim SMT and bring it back to around 20% of the total portfolio. 37.5% is too much even for an IT. Put some of the proceeds into Finsbury Growth and Income and maybe RIT. You could also trim Alliance and bring it back to around 20% as well. I would generally look to more or less balance the holdings although that Implies around 15% for each holding especially if you introduce another holding. On the basis of letting your winners run I would leave SMT, Alliance and F & C at rather higher levels say 20% each and aim to spread the other 40% amongst the other four or five holdings.

Good for you.

Dod

[StOmer]

Thanks for posting this interesting question. I would rebalance, I had SMT at around 20% last summer but got concerned about Tesla so cut it to 10%. Over those 20 years of holding SMT it has undergone a few changes and may no longer represent the risk you are comfortable with, it has also recently undertaken to hold more unquoted stock but this is a trend that looks to grow.

Martin Currie Global is a steady one with a discount control system in place, or perhaps Monks from the same house as SMT may be a suitable choice. I think RIT is too expensive on the current premium but do like Finsbury Growth which I have alongside SMT. If looking at Fundsmith then I would also consider Lindsell Train Global and Blue Whale Global, both in good form.

[Aminatidi]

If you're considering Fundsmith also consider Lindsell Train Global Equity.

Both fine choices (in my biased opinion as I hold both! )

[Avantegarde]

I would trim the SMT holding because you have most of your eggs in very few baskets and because I find it hard to believe that the "outperformance" of SMT will continue for another 10-20 years. I would add Bankers and Edinburgh Worldwide (I have shares in both). Why? Because they have in the past five years produced a better total return - 84% and 141% respectively - than their comparable global indices. I would also invest in a global tracker which will give you decent returns at a low cost.

[Dod101]

I am not criticising any of the recs (I have after all made one or two myself) but many ITs will have periods of out performance and then revert to the mean, I suppose. I think therefore that you need to get 'under the skin' of the trust and see what the Directors are aiming for and how they operate. Managers come and go but Boards of Directors tend to retain the same aims and values even although the individual directors change. Buying on the basis of past performance is the only 'hard' evidence we can go on but it really cannot tell us much about the future.

Dod

[Runt24]

Dod, I acknowledge City of London was a slight diversion and one that might have been a bit premature. With another 15-25 years of work before me, growth should remain more important and it’s something I need to rectify as part of this process perhaps? I think when I looked, it was a decision made on total return, or just the hopeful aspiration that retirement was closer than was realistic!?

Others have shared the same reservations towards funds with a specific bias, it’s one I’ve noted, and one I’ve deviated from with the purchase of Blackrock Smaller.

One Trust I’ve long since thought about (probably too much with not enough consequent action has been what was F&C Global Smaller Companies). Noticed that Oryx was one that John Barron holds and he seems to have a heavy bias to Smaller Company trusts. I know he also used to recommend moving East for good growth.

RIT is on a hefty premium at present as St0mer notes. I bought in with the discount, which it might return to with the departure of Jacob? I buy monthly and hope one will iron the other out.

Lindsell Train was partly the reason for getting into Finsbury. I couldn’t stomach the premium, which is why I’m looking at the Unit Trust equivalents and is somewhere Aminatidi has already been by the look of things!? The Finsbury commitment causing me to lean more towards Terry Smith, and to get the Japanese element from elsewhere. Think Ruffer does similar in the way it invests in Japan?

Unit Trusts are new territory for me.

Avantegarde has mentioned Bankers, a recommendation from the same source as recommended SMT 20 years ago when I was a young boy with aspirations of investing in all manner of things which would have got my fingers burnt, particularly on the back of the Tech Boom and the idea I could get rich quick. Wise counsel, he’s now departed this earth well before his time. Like Dod I recall him sat at his desk imploring me not to be sucked into specific territories or themes, but to be broader in my outlook, probably when I was hopping about his office wittering on about Tech Funds.

With that, and Avantegarde’s advice in mind, is the Vanguard Value ETF any good or can you recommend others? Again this is new territory.

Seen Dod’s suggestion of Caledonia for Aminatidi? I know this is one that Merryn Somerset-Webb has in the Moneyweek portfolio I found today. She also recommended cutting back on the SMT exposure in her article.

I am not approved to post links though!

Plenty to ponder, although I’m not sure which way to jump, which is why I’m guilty of doing nothing in the past. I now need to sort myself out and do something for the future.

Thank you to all.

Runt.

[Aminatidi]

For what it's worth I hold equal sums right now of:

* Capital Gearing Trust
* Finsbury Growth & Income Trust
* Lindsell Train Global Equity
* Fundsmith

Like you say there is overlap between Finsbury Growth & Income Trust and Lindsell Train Global Equity but I would say use tools like MorningStar's x-ray to work things out as my largest exposure to any one equity is around 4% as I don't believe you make money without some concentration otherwise you're heading into tracker territory.

If you go on the Fundsmith website there are all the previous AGM videos where you can hear Terry Smith.

For me the main difference between SMT and Fundsmith and Lindsell Train Global Equity (or Finsbury) is that SMT is a massive bet on tech and (to a degree) the companies of the future whilst Fundsmith & Lindsell Train are more around brands and businesses that have already made it.

Throw in a consumer staples bias i.e. you may not go and buy a Tesla but you'll probably keep on brushing your teeth.

[scrumpyjack]

I too have a very large holding of SMT, as a result of it having risen so much. I will hold on as I like to let my winners run and I agree with James Andersen's approach. I am also loath to incur a large CGT bill.

I also hold Murray International but am not too happy at the large tobacco and fixed interest holdings. Perhaps MYI have gone down that route in order to maintain the high income level. I'm more likely to get rid of MYI and reinvest in another IT

[kempiejon]

Of my ITs SMT has done well too, I'm happy with the holdings and direction and it invests in things I wouldn't hold directly, I also have both the Murrays and City. I'm happy to continue to hold all of them and I largely ignore and holdings concentrations.

Like you say there is overlap between Finsbury Growth & Income Trust and Lindsell Train Global Equity but I would say use tools like MorningStar's x-ray to work things out as my largest exposure to any one equity is around 4% as I don't believe you make money without some concentration otherwise you're heading into tracker territory.

A ftse 100 tracker would have 10% in shell, 5% in BP 7% in HSBC and around 3/4% in each of GSK and Astra Zenneca.

Maybe if a third of my total invested wealth was in SMT I'd like to reduce that but if I had other assets, a pension and was still employed I'd more likely redirect rather than sell some. I have no thoughts to offer on the other suggested replcements in the OP.

[MaraMan]

No great difference to most other posters in terms of ideas, but I too have large holdings in SMT & Monks, and also in Fundsmith, LTGE, FGT, RIT and CLDN. All have done pretty well, but the first three particularly so and they probably need rebalancing. As a principle in the long term I think rebalancing is a good idea. If I didn't hold Fundsmith I think moving some of the SMT growth there is a good idea as they are so different, but perform very well in their own sectors. I too avoided Lindsell Train IT because of the huge premium and went for FGT instead. I am a little surprised at your holding of CTY if you only seeking long term growth, it seems to be more of a trust for income seekers, but each to their own and I suppose is a good sleep easy holding.

MM

[Hariseldon58]

SMT has clearly done very well over the last few years and for the OP where is has become a substantial part of the portfolio, I’d look forward rather than backwards.

If I was investing in a collection of say 7 Trusts now, with a lump sum, would I weight equally or place almost 2/5 of the portfolio in a single trust that has had a great run over recent years?

It’s worth noting that SMT has performed pretty much in line with Nasdaq index (with an extra kicker from the currency effect since 2016). So whilst the manager has done a great job, is the tech sector giving it a mighty push along and will this continue.

Finally, SMT is 37.5% of how much ? If it’s £100k then it’s a sizeable % but not an enormous sum in £ but if the portfolio is £10m the £3.7m in one Trust would feel uncomfortable... this is my personal viewpoint and I rather expect many would disagree.

[Dod101]

Finally, SMT is 37.5% of how much ? If it’s £100k then it’s a sizeable % but not an enormous sum in £ but if the portfolio is £10m the £3.7m in one Trust would feel uncomfortable... this is my personal viewpoint and I rather expect many would disagree.

I have often pondered this issue. However to me it is surely the percentage of the portfolio that matters not the absolute figures. I find it difficult to know but as I do not have £10 million it is somewhat academic for now anyway.

For what it is worth my SMT is about 6.3% of my total portfolio and my biggest holding, Unilever, is almost 8%. They have both done very well over the last few years and it is maybe time I was thinking of trimming them. Unilever is not in an ISA although SMT is. I need to be careful with Unilever and CGT.

Dod

[scrumpyjack]

If the total portfolio is £10m or £20m and you can quite easily get along with the 37% SMT having collapsed in price then maybe it is not just the percent nor just the absolute amount, but a combination depending on your circumstances.

However having 30% in one company (Unilever) must be a lot riskier than having 30% in one Investment Trust where the underlying investments are in many separate companies).

Also I'm not sure that SMT is really very much riskier than, say the FTSE100. SMT is invested in major companies carefully considered to be world changing businesses of the future.

The FTSE 100 is mainly huge mature UK companies (OK operating globally) in the industries of the past - banks, oil, pharma etc. Any of these could be obliterated by future economic changes, as have the majors of the past like GEC, ICI etc

[77ss]

... There doesn’t seem to be much out there that can provide me with the same returns as SMT, but Fundsmith is one of them. ....

Well done with SMT!

Personally, I would be uncomfortable being so exposed to a single IT, however good its record, so would rebalance in some way.

You might like to look at Allianz Technology Trust (ATT). Zero yield, which wouldn't suit everybody, but if HL's charting is to be believed (easily checked for a zero yielder), it has a 5 year total return of 250% - compared with SMT's 180% (and Fundsmith's 160%).

There would be little, if any, gain in sectoral or geographical diversification but you would be less reliant on the performance of a single management team. Managerial diversification !

[Lootman]

You might like to look at Allianz Technology Trust (ATT). Zero yield, which wouldn't suit everybody, but if HL's charting is to be believed (easily checked for a zero yielder), it has a 5 year total return of 250% - compared with SMT's 180% (and Fundsmith's 160%).

I wonder whether if you strip out the wonderful returns from FAANG from SMT whether the rest is anything special?

Because you can always buy AAPL, AMZN, FB, GOOG and MSFT (favoured over Netflix) and have exposure to that $4 trillion worth of market cap without any overhead.

For that matter even a S&P 500 tracker will have a significant exposure to those names which have really driven wealth creation over the last decade or more. The risk is in not owning them.

[nmdhqbc]

I wonder whether if you strip out the wonderful returns from FAANG from SMT whether the rest is anything special?

Well this article seems to say their unquoted stocks outperformed. Not sure about quoted non-FAANG.

https://www.investorschronicle.co.uk/fu ... companies/