Investment trust insider on style, AI, and Smithson – James Carthew: Too early for me to make ‘contrarian’ play on Smithson
As giant AI-related stocks continue to reign supreme, Smithson’s focus on high-quality small caps is worth considering.
This week I want to ponder the importance of investment style on returns. It is over three and a half years now since interest rates started to climb and investors fled a swathe of trusts, triggering the discount issues that have plagued the sector since. However, it is also now a year since the Bank of England began cutting rates.
Even though there is a sense that the next rate cut is a way off, with the latest reduction to 4% (1.25% below the recent peak) in the bag, it feels reasonable to wonder why investor sentiment towards many of the trusts that were hit in that selloff is still lukewarm at best.
Falling interest rates are not just a UK phenomenon. US rates started to drop last September, and while there has been disappointment – not least in the White House – that this has stalled so far in 2025, the general consensus is that the trend is still downwards. In Europe, rates are less than half the level that they were in May 2024. Interest rates are falling in China and India too. Only in Japan are they going the other way.
Looking at the returns on the MSCI All Countries World style indices, growth and momentum are still doing much better than value over the past year. Large caps are outperforming mid caps, and small caps trail behind by some distance. In addition, as has been the case for some time, investors do not seem to be looking for ‘quality’ stocks.
The numbers seem to reinforce the idea that the only theme that is working currently is mega cap AI. You would definitely get that impression by looking at how far Manchester & London (MNL) portfolio returns are ahead of its global peer group.
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