Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Perivan 265191

Smithson Investment Trust plc

6th Floor

125 London Wall

London

EC2Y 5AS

Small &

Mid Cap

Investments

That

Have

Superior

Operating

Numbers

Annual Report

for the year ended 31 December 2022

E smithson@fundsmith.co.uk

W www.smithson.co.uk

1

Strategic Report

2 Key Information

3 Performance Highlights

5 Chairman’s Statement

9 Investment Manager’s Review

17 Investment Portfolio

18 Investment Objective, Policy and

Investment Methodology

21 Business Review

23 Risk Management

26 Viability Statement

27 Non-Financial Information

2

Governance Report

32 Board of Directors

33 Report of the Directors

37 Corporate Governance Report

41 Statement of Directors’

Responsibilities

42 Audit Committee Report

45 Management Engagement Committee

Report

47 Directors’ Remuneration Report

3

Financial Statements

51 Independent Auditor’s Report

58 Statement of Comprehensive Income

59 Statement of Financial Position

60 Statement of Changes in Equity

61 Statement of Cash Flows

62 Notes to the Financial Statements

4

Further Information

75 Shareholder Information

76 Alternative Investment Fund Managers

Directive Disclosures

78 Alternative Performance Measures

80 Glossary of Terms

83 How to Invest

85 Company Information

Contents

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

2

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Investment Objective

Smithson Investment Trust plc

(the “Company”) aims to provide

shareholders with long term growth in

value through exposure to a diversiﬁed

portfolio of shares issued by listed or

traded companies.

The Company’s investment policy is to invest in shares issued by small

and mid (“SMID”) sized companies with a market capitalisation (at

the time of initial investment) of between £500 million and £15 billion

on a long-term, global basis. The Company’s approach is to be a

long-term investor in its chosen stocks. It will not adopt short-term

trading strategies. Accordingly, it will pursue its investment policy by

investing in approximately 25 to 40 companies.

Investment Approach

1. Buy Good Companies

The Investment Manager focuses on investing in those companies

it believes can compound in value over many years. It seeks to

achieve this by selecting companies that have an established track

record of success, such as having already established a dominant

market share in their niche product or service or having brands or

patents which others would find difficult, if not impossible, to

replicate. The Investment Manager believes such SMID sized

companies tend to out-perform large companies and that there is

also an investment opportunity to take advantage of greater

discrepancies between the share price and valuation of SMID sized

companies, in part due to lighter research coverage and less

information being available on them. SMID sized companies tend

to have higher expected returns but also higher expected risk,

defined as price volatility (a measure of how much its price moves

over time), when compared to larger companies. However, adding

a small and mid cap portfolio to a large cap portfolio can raise

expected returns without increasing risk, due to the different risk

and return characteristics that SMID sized companies provide.

2. Don’t overpay

The Investment Manager seeks to invest in SMID sized companies

that exhibit strong profitability that is sustainable over time and

generate substantial cash flow that can be reinvested back into the

business. Its strategy is not to overpay when buying the shares of

such companies and then do as little dealing as possible in order

to minimise the expenses of the Company, allowing the investee

companies’ returns to compound for shareholders with minimum

interference.

3. Do nothing

The Investment Manager looks to avoid companies that are heavily

leveraged or forced to rely upon debt in order to provide an adequate

return, as well as sectors and industries that innovate very quickly

and are rapidly changing. It instead focuses on companies that have

exhibited an ability to continue outperforming competitors and will

look for companies that rely heavily on intangible assets in

industries such as information technology, health care and

consumer goods. The Company’s investments will be long-term and

the Investment Manager will not be forced to act when market prices

are unattractive.

Company Policies

• Long term capital growth

The Company is focused on long term capital growth and overall

return rather than seeking any particular level of dividend. The

Company will only declare dividends to the extent required to

maintain the Company’s tax status as an investment trust.

• No hedging

The Company will not use derivatives for currency hedging or for any

other purpose.

• No gearing

The Company will not employ leverage save that it is permitted to

use short term banking facilities to raise funds for liquidity purposes

or for discount management purposes including the purchase of its

own shares. Any such borrowing will be limited to 15 per cent. of the

Company’s net asset value.

Strategic Report

Key Information

3

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Source: Bloomberg

This report contains terminology that may be unfamiliar to some readers. The Glossary in the Annual Report gives definitions for frequently

used terms.

4 Year Record

1 These are Alternative Performance Measures (“APMs”). Definitions of these, together with how these measures have been calculated, are disclosed on pages 78 to 79 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.

For the period from

Company’s listing on

For the year ended For the year ended 19 October 2018 to

31 December 2022 31 December 2021 31 December 2022

% change

2

% change

2

% change

2

NAV total return per share

1

-28.1% +18.9% 41.1%

Share price total return

1

-35.2% +18.1% 30.8%

Benchmark total return

3

-8.7% +17.8% 34.9%

Ongoing charges ratio

1

0.9% 1.0% –

At At

31 December 2022 31 December 2021

Net assets £2,417,967,000 £3,367,070,000

Net asset value (“NAV”) per ordinary share (“share”) 1,410.7p 1,961.0p

Share price 1,308.0p 2,020.0p

Share price (discount)/premium to NAV

1

(7.3)% 3.0%

At 31 December 2022 2021 2020 2019

Net assets £2,417,967,000 £3,367,070,000 £2,331,950,000 £1,437,305,000

NAV per ordinary share 1,410.7p 1,961.0p 1,648.9p 1,255.2p

Share price 1,308.0p 2,020.0p 1,710.0p 1,298.0p

Share price (discount)/

premium to NAV

1

(7.3)% 3.0% 3.7% 3.4%

Year ended 31 December

NAV total return

per share

1

-28.1% +18.9% +31.4% +33.2%

Share price total return

1

-35.2% +18.1% +31.7% +29.8%

Benchmark total return

3

-8.7% +17.8% +12.2% +21.9%

Ongoing charges ratio

1

0.9% 1.0% 1.0% 1.0%

Performance Highlights

Strategic Report

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

1 Source: Bloomberg

2 Figures rebased to 1000 as at date of Company’s listing

Total return performance against NAV for the period from the Company’s listing on 19 October 2018 to 31 December 2022

1

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Launch

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Net Asset Value total return performance against MSCI World SMID Cap Index for the period from the Company’s listing on

19October 2018 to 31December 2022

2

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NAV MSCI World SMID

Launch

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4

Strategic Report

Performance Highlights

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Introduction

I am pleased to present the Annual Report of Smithson Investment

Trust plc (the “Company”) for the year to 31 December 2022. This

is our fourth Annual Report, and the first year in which the

Company’s net asset value has fallen. Whilst this decline is

disappointing, it comes against the backdrop of a steep decline in

markets across the world. The Company’s net asset value per share

has, however, fallen by more than the MSCI World SMID comparator

index in 2022, the first year this has occurred, and the Company’s

shares have traded at a discount to net asset value through most

of the year.

There are two points which are worth emphasising, both of which

are covered in greater detail in the Investment Manager’s Review.

Firstly, our portfolio companies grew their businesses in 2022

despite the difficult market conditions and their financial key

performance indicators were all materially better than those of the

comparator index, demonstrating their characteristics as high

quality companies. Unfortunately, the progress made by the portfolio

companies was not sufficient to offset the impact on growth

company valuations of the hike in interest rates. Secondly, only two

segments of the comparator index actually registered positive

returns in 2022 (Energy and Utilities); those two segments are

therefore largely responsible for the index’ comparatively better

performance. The Company does not invest in either of these

segments as they do not meet the Investment Manager’s criteria for

potential long term shareholder returns. Whilst it is disappointing to

report on periods when asset values fall, the focus remains on long

term value creation.

The Company’s performance and the Board’s actions in response

to the discount are summarised below, and the Investment

Manager’s Review discusses the portfolio’s performance in greater

detail.

Performance

The decline in the Company’s net asset value (NAV) per share for the

year was 28.1%

1

, underperforming the MSCI World SMID Index by

19.4 percentage points. At the interim stage, the fall in net asset value

which the Company reported was 31.7%, so the outturn for the year

is after recording a small improvement in the second half. Despite

this significant underperformance, the Company’s annualised NAV

per share total return since inception is +8.5%

1

, 1.1% higher than the

annualised return from the index with dividends reinvested.

As noted in the Investment Manager’s Review, the decrease in

portfolio company valuations during the year was such that at the

year end, they were trading on free cash flow ratings comparable to

those at the time of the Company’s launch in 2018. This means that

the growth in the Company’s net asset value per share since IPO,

which exceeds that of the comparator index, can largely be

attributed to the underlying trading performance of the portfolio

companies.

The Company’s shares, which traded at a premium to NAV for the

vast majority of the period from launch in 2018 through to the end

of 2021, have traded at a discount for almost all of 2022, and have

continued to do so in the first part of 2023. The discount at the end

of the year was 7.3%

1

, narrower than the 11.5% at the end of the

first half of the year, but representing a very significant shift down

from the 3.0% premium at the end of 2021. Combined with the

negative total return on the NAV, to move from a modest premium

to a discount has resulted in the share price total return for the year

of negative 35.2%

1

. This has reduced the annualised share price

return total return since inception to 6.6%

1

, 1.9 percentage points

lower than the annualised increase in NAV per share.

The Company is a member of the FTSE 250 Index with a market

capitalisation at the end of 2022 of £2.24 billion.

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 on pages 78 to 79.

5

Strategic Report

Chairman’s Statement

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

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. 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 to meet

demand and to manage the premium.

When the Company’s shares started trading at a discount in the first

half of last year, the Board, in consultation with its advisers and the

Investment Manager, sought to address the situation through the

use of share buy backs.

During 2022 the Company issued 5.4 million new ordinary shares

to raise £92.5 million net of costs and bought back 5.7 million

ordinary shares at a cost, after dealing charges, of £74.0 million.

The share allotments and buybacks each represented over 3% of

the Company’s issued share capital at the start of the year. All share

allotments and buybacks were accretive to the Company’s net asset

value per share. The average premium to net asset value at which

new shares were allotted was 2.6% and the average discount to net

asset value at which shares were bought back was 8.7%. The

buybacks accounted for over 10% of the Company’s shares being

traded on the LSE in the period since the buybacks started.

The buyback programme is continuing and since the year end up

until 22 February, being the latest practicable date before the

printing of this report, a further 1,050,000 shares have been bought

back at a cost of £15.0 million after dealing costs, with an average

discount to net asset value of 7.5%.

As a matter of law, the Company is only permitted to fund purchases

of its own shares out of its distributable reserves or the proceeds

of a fresh issue of shares; and while the ordinary shares are trading

at a price less than the latest published net asset value per share,

the Company is not able to issue new shares.

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 it feels

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. An application

has been made to the High Court to sanction the capital reduction.

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 be proposed at the forthcoming

Annual General Meeting.

Results and Dividends

The Company’s total loss after tax for the year was £967.6 million,

comprising a capital loss of £972.0 million and a revenue profit

after tax of £4.4 million (see page 58).

The revenue profit after tax arises because the Company’s dividend

income in the year was higher than its operating expenditure. All the

Company’s operating expenditure 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 2022, and therefore a dividend is not proposed by

the Board.

The Company has never paid a dividend. 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.

6

Chairman’s Statement

Strategic Report

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

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.

As a closed-end investment vehicle focusing on capital growth, the

Company is free to focus its energies on pursuing its strategy

without having the limiting factors of funding client redemptions,

dividend payments (other than a minimum to maintain investment

trust status) or gearing concerns. The Company has a strong

balance sheet of highly liquid investments.

The Company expects to hold between 25 and 40 investments; at

the year-end it held 31. The composition of the portfolio at

31 December 2022 is shown on page 17, and the Investment

Manager’s Review explains the investment approach, and the

performance and evolution of the portfolio in detail.

Investment Policy

At the Company’s AGM in April the shareholders approved a revision

to the investment policy, which clarified that the investment

restriction as to market capitalisation range applies at the time of

initial investment in a company and removed the expectation of the

average market capitalisation of investee companies. This change,

which came into effect on 3 May 2022, has had no effect, in any

way, on how the Company’s investments are managed.

Governance

I took over as Chairman of the Board at the end of February 2022

and Lord St John of Bletso replaced me as Chairman of the Audit

Committee. Jeremy Attard-Manche joined the Board on 1 March and

is Chairman of the Management Engagement Committee. As part

of our succession planning and to broaden the experience of the

Board, Denise Hadgill was appointed as a Director of the Company

with effect from 1 June 2022. We will all stand for election or

re-election at the AGM, and details on our background and

experience are given on page 32.

ESG and Stewardship

During the year I have been asked quite a few questions by

shareholders about the Company’s approach to ESG and the

stewardship of its portfolio companies. This is explained in greater

detail in the document on the Company’s website entitled ESG

Integration, which has also been uploaded to the Association of

Investment Companies website. The Board has delegated

responsibility for all stewardship responsibilities to the Investment

Manager and is updated at each Board meeting on any significant

developments or interactions with investee companies. One of the

benefits of holding a comparatively concentrated portfolio of shares

is that the Investment Manager has more time to spend following

developments at each portfolio company and has good and regular

access to the top management in portfolio companies. The

Investment Manager, furthermore, does not delegate voting to any

outside agency, regarding this as an important shareholder

responsibility which needs to be undertaken, thoughtfully, in-house.

Fundsmith is a signatory to the FRC’s ‘UK Stewardship Code 2020’.

Fundsmith’s Stewardship Report 2021, together with the

aforementioned ESG Integration document, are available on the

Company’s website at www.smithson.co.uk. A few examples of the

engagement with investee company management are given in the

Investment Manager’s Review and a report on voting activity is

included in the Strategic Report.

Annual General Meeting (“AGM”) and Shareholder

Engagement

The Company will hold its AGM on 27 April 2023. 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.

7

Strategic Report

Chairman’s Statement

8

We encourage shareholders to visit the Company’s website where

more information is available on the Company.

Outlook

The improvement in the Company's net asset value which

commenced in the second half of 2022 has continued, to date, in

2023. However, uncertainty around future interest rate rises, high

levels of inflation and fears of a recession are likely to continue in

the coming year. Whether the opening of the Chinese market post

the lifting of COVID-19 restrictions will have a positive impact by

generating economic growth or unleash further inflation or both is

also uncertain. Political uncertainty has increased and there seems

no end in sight to the Ukraine conflict. These are not easy conditions

for a portfolio manager to navigate.

The Investment Manager’s Review provides an overview of how our

portfolio companies might be expected to respond to the continuing

economic uncertainties and why we believe they are high quality

companies with robust business models which will continue to

demonstrate resilience during periods of challenging market

conditions.

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 in the small and mid-cap

sector, the long term investor will be well rewarded.

Diana Dyer Bartlett

Chairman

27 February 2023

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Chairman’s Statement

Strategic Report

9

Investment Manager’s Review

Strategic Report

The Investment Manager’s Review was first published as a letter to

shareholders on 30 January 2023 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 2022.

Dear Fellow Shareholder,

The performance of Smithson Investment Trust (‘Smithson’), along

with comparators, is laid out below. In 2022 the Net Asset

Valuepershare (NAV) of the Company decreased by 28.1% and the

share price declined by 35.2%. Over the same period, the

MSCIWorld Small and Mid Cap Index (‘MSCI World SMID’), our

reference index, declined by 8.7%. We also provide the performance

of UKbonds and cash for comparison.

Total Return

5

1 January 2022

to 31 December Launch to 31 December 2022

2022 Cumulative Annualised

% % %

Smithson NAV

1

-28.1 +41.1 +8.5

Smithson Share Price -35.2 +30.8 +6.6

Small and Midcap

Equities

2

-8.7 +34.9 +7.4

UK Bonds

3

-15.0 -9.9 -2.5

Cash

4

+1.4 +2.8 +0.6

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 pages 78 to 79).

In the first paragraph of last year’s letter we suggested that it would

not be possible to outperform every year and that there would be

some periods of underperformance. Despite knowing that no

strategy, if followed with discipline, can outperform in all periods, it

is always unpleasant when a year of underperformance arrives, and

the extent of the poor performance this year was particularly painful.

There was clearly one dominant factor at play contributing to this

outcome, and it impacted the portfolio consistently throughout the

year: the rising market expectation for interest rates.

As we now know, inflation started accelerating in 2021 and did not

turn out to be ‘transitory’ as several of those in charge of central

banks believed it to be at the time. In fact, it quickly became

entrenched, and was exacerbated by the war in Ukraine, which

further propelled energy and food prices.

This caused a sharp volte-face by central banks, which began raising

interest rates in March 2022 by increasing increments until 75 basis

point moves, a major increase by historical standards, became the

norm. The effect this had on the market’s expectations for future

interest rates was profound. At the beginning of 2022, bond markets

were indicating that the upper bound of the Fed’s policy rate would

be 1% by 2023. In December 2022, the Fed rate was already 4.5%

and market expectations were for a 2023 peak of over 5%.

While not at the 19% level it took to shock the US economy into

submission in 1980, it is difficult to overstate the impact this move

had on asset prices. By which, of course, I am not just talking about

stocks, bonds and crypto currencies, where price movements are

observed most immediately, but also real estate, art, classic cars

and anything else that was a recipient of the world’s recent savings

glut. We always restrict ourselves to a maximum of one quote from

Warren Buffett per letter and it is probably best used here, to

cement the importance of the relationship in our minds: “Interest

rates are to asset prices like gravity is to the apple”.

The reason for this is because the value of any asset, companies

included, is the total of the future cash flows you can expect to

receive, discounted back to today’s monetary value using the

prevailing interest rate. As rates rise, today’s value of the future cash

flows decreases, and thus the value of the asset declines.

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

10

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

While this increase in interest rate expectations affected the whole

stock market, unfortunately the shares owned in the portfolio were

affected more than most. This is because our high quality

companies are growing faster than the market average and

generating more cash flows in the future. In practical terms, their

faster growth meant the valuations of our companies at the end of

2021 were higher than the average in the market, and therefore fell

further than the market as rate expectations moved.

Another way of explaining the relative underperformance is by

looking at the sector performance of the MSCI World Small and

Midcap Index alongside the sector weightings of the portfolio.

Twelve months to 31 December 2022 Sector Performance

MSCI W SMID (%) SMITHSON

Sectors WEIGHT (%)

Energy +64% –

Utilities +12% –

Consumer Staples 0% 4%

Financials -2% 3%

Materials -3% –

Industrials -8% 23%

Health Care -15% 15%

Real Estate -16% –

Consumer Discretionary -18% 13%

Information Technology -20% 38%

Communication Services -23% 3%

It becomes immediately apparent that the worst performing sectors

of the index were also those to which Smithson is most exposed

and, just as unfortunately, the positively performing sectors were

commodity driven and therefore contain companies which we will

never own.

Other factors weighing on share prices are the potential effects of

cost inflation, and a likely recession brought about by the tightening

of monetary policy. In fact, it was expected by the International

Monetary Fund at the end of 2022 that a third of the global

economy could enter recession over the next 12 months, although

more recent commentary has indicated a reduction in this threat.

While recession holds some trepidation for us, the quality of the

companies held in the portfolio, including their lower level of

cyclicality and generally strong balance sheets, should enable them

to weather the storm better than other companies in the market.

However, they will still be susceptible to share price falls should the

recession turn out to be worse than currently expected by market

participants.

It is perhaps worth stating again that we are not particularly

concerned about the effects of inflation on our portfolio companies,

especially compared to other companies in our reference index. The

reason for this is that our companies tend to have high gross

margins and low capital requirements, which mean that they are

less susceptible to cost increases than other companies. They are

also in strong competitive positions, which typically allows them to

increase prices to offset higher costs, should they choose to do so.

So what next? While we would like to say that all the poor

performance is behind us, there is no guaranteed way to tell what

is ahead. The best we can do is to follow the advice of veteran bond

investor Howard Marks by attempting to understand where we are

at this given moment. We observe market expectations for future

interest rates to move back to historical averages, regional inflation

rates decelerating, commodity prices declining, supply chain

bottlenecks easing and employment growth moderating helping to

temper wage inflation.

We also observe signs of significant bearishness in the market. The

December 2022 Bank of America Fund Manager Survey indicated

that more fund managers are now overweight bonds (a sign of

seeking safety) than at any time since 2009. Another interesting

gauge is to observe the reaction of the stock market to major news

events and data releases. Typically, there are both positive and

negative elements to most news items, for example, a strong

employment number means the economy is likely to keep growing,

but on the flipside, central banks might also keep raising interest

rates. The market reaction will indicate overall investor sentiment,

and it feels to us that for most of the year, the stock market was

reacting negatively to such news.

We therefore suspect that we are potentially close to the end of

stock market declines for reasons of inflation and interest rates,

although possibly not yet through the worst in terms of recessionary

fears, given these have yet to be realised (or disproved). This last

point might be helped in the near future by the recent reopening of

China from Covid restrictions, which, given the sheer size of its

manufacturing sector and consumer demand, will provide a

noticeable boost for the global economy. To illustrate the powerful

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11

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

effects that both the Federal Reserve and the Chinese economy

have on global stock markets, we can borrow from investor Michael

Howell, who said, “the stock market’s price-earnings multiple is

determined in Washington and its earnings Beijing”.

Unfortunately, not all of the underperformance against the market

was inflicted upon us by macroeconomic factors; we made some

mistakes too. Principal among these was not selling certain

companies which were overvalued at the end of 2021. These

included Domino’s Pizza Enterprises and Fortinet, two positions that

we reduced in size due to our concerns over valuation, but on

reflection, could have trimmed more aggressively or perhaps even

exited. We remain holders as the falling share prices quickly

returned the valuations to more comfortable levels.

There is some good news. Save for a couple of positions, we are

very confident in the fundamentals of the businesses held in the

portfolio. While a recession may continue to hold back cash flow

growth for a while, none of these companies will suffer meaningfully,

and certainly not to a degree which would keep us awake at night.

As the below list of largest detractors of performance shows, there

are a couple of exceptions to this; companies whose poor share

price performance was exacerbated by deteriorating fundamentals.

Country Contribution %

Fevertree Drinks United Kingdom -3.2%

Temenos Switzerland -2.6%

Nemetschek Germany -2.1%

Rightmove United Kingdom -1.7%

Domino’s Pizza Group United Kingdom -1.3%

Fevertree suffered very strong cost inflation in logistics (until

recently much of their product was shipped around the world from

bottling plants in the UK and Europe) and packaging including glass

and tin, compressing the gross margin from over 50% in 2019 to

under 40% by the end of the year. This decline in margin has taken

place because management decided not to put up prices, as they

wanted to maintain the strong sales momentum that they are

enjoying in large markets such as the US. We remain holders for

now as we believe that over time the company can improve the

margin, with our confidence boosted by the likelihood that margins

in more mature markets such as the UK, which are not disclosed

separately, are still very favourable. If this is combined with

continued growth in revenue, the potential for future cash

generation is substantial.

Temenos has been going through a transition from selling its

banking software as a perpetual licence, to selling it as a

subscription or a service, otherwise known as ‘SaaS’. This should

make little difference to the business structure over the long term,

although some argue it could be a positive due to higher potential

revenue from individual customers over time, but in the interim it

causes a decline in profits and cash flow as the high up-front

payments for licences are substituted for smaller annual or monthly

subscription payments. On top of this, there appears to have been

a slowdown in the number of new contract signings for the company,

as its bank clients are hesitating to spend more on their IT systems

ahead of a potential recession. Having spent some time with the

CEO and Chairman to understand what was going on behind the

scenes, we were growing concerned that these issues weren’t being

managed as well as they could be, and so were not upset by the

recent announcement of the CEO stepping down and a previous CEO

taking over in the interim.

Nemetschek is a company selling design software to the

construction and media industries and suffered from a combination

of a high valuation owing to its fast growth, and market concerns

regarding a future recession in the construction industry.

Rightmove, the UK online property portal, fell due to concerns over

the UK housing market in an environment of rising mortgage rates,

a cost of living crises and a potential recession. It is worth

remembering that Rightmove’s revenue, being generated by

subscriptions from estate agents, has no direct link to house prices

or sales volumes, and has actually continued to increase. However,

should some estate agents go out of business, which tends to

happen when the housing market declines, then they will lose

subscribers and Rightmove’s sales will fall. The positive to this is

that a new estate agent only needs a laptop, phone and contact list,

which means that the number of estate agents tends to rebound

quickly after any market correction.

Domino’s Pizza Group declined due to market worries about a

UK recession, although we are a little more sanguine. While a

reduction in disposable income will put some sales at risk, we

believe that those in the food industry most likely to suffer are

casual dining outlets, while ‘better value’ takeaway options might

prove more insulated from such pressure as people continue to treat

themselves to ‘affordable luxuries’ when times are tough. We also

suspect the men’s football World Cup will have provided a tailwind

to sales into the end of the year.

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12

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Top five contributors to performance are shown below.

Country Contribution %

Rollins United States 0.4%

Technology One Australia 0.2%

Moncler Italy 0.2%

IDEX United States 0.1%

Qualys United States -0.1%

It may come as a surprise that there were some companies in our

quality growth portfolio that rose during the year.

Rollins, a US pest control company, was the best performer. This is

a business with highly repeatable earnings given that in some parts

of the US where it operates it is necessary to have frequent visits

from pest control to keep buildings habitable. This leads to much of

its revenue being paid on subscription and thus fairly dependable,

which is almost certainly why the shares performed well in a period

of concerns regarding inflation and recession.

TechnologyOne is perhaps the most surprising performance

contributor, given that it is a fast growing software company.

However, the shares reacted well as sales and earnings continued

growing strongly throughout the year, more than offsetting the

downward pressure on market valuations. The institutions it sells to

include governments, universities and the military, which are yet to

be affected by the macroeconomic environment.

While Moncler’s share price declined during the year, we were

fortunate to acquire the position at a relatively low point, which

meant that it was a positive contributor to the fund by the end of

the period. This was also the case for IDEX.

Qualys, the US cyber security company, did better than average as

its revenue growth continued accelerating throughout the year.

While we do expect a recession to weigh on companies’ information

technology budgets, and therefore cyber security sales, it should

still be more robust than other categories given the constant and

increasing threat of cyber crime.

As ever, we continue to follow the same simple strategy:

• Buy good companies

• Don’t overpay

• Do nothing

To demonstrate that we do indeed buy good companies, we 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.

Smithson

LTM Figures Investment Trust MSCI WSMID

ROCE 43%

#

11%

Gross Margin 65% 34%

Operating Profit Margin 25% 9%

Cash Conversion 101% 66%

Interest Cover 34x 7x

Data for the MSCI World SMID Cap Index is shown ex-financials, with

weightings as at 31.12.2022.

Data for MSCI World SMID Cap Index is on a weighted average basis, using

last available reported financial year figures as at 31.12.22.

Data for Smithson is on a weighted average basis, ex-cash, using last

available reported financial year figures as at 31.12.22.

Interest cover (EBIT ÷ net interest) data for Smithson and MSCI World SMID

Cap Index is done on a median average basis.

# ROCE for Smithson includes Rightmove (206% ROIC) and Verisign (330%

ROIC). Excluding Rightmove, the ROIC is 38%; excluding Verisign it is 30%;

and excluding both, it is 23%.

The table shows that our portfolio companies remain superior to

those in the Index on every metric, with return on capital employed,

gross margin and operating margin being of significant importance

in the current environment and particularly in excess of that

observed for the Index.

The next step, of 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.

Valuations are now more attractive than they were a year ago. The

free cash flow yield of the portfolio is 3.3%, having been at 2.0% at

the start of 2022. By coincidence, the current level is roughly where

the portfolio was trading when we launched the Trust at the end of

2018, although it is worth bearing in mind that this figure includes

Sabre and Ambu, two companies which did not produce any free

cash flow in 2022, but did in 2018. They also contributed to the fact

that the free cash flow generated by the portfolio was actually 7%

lower than in 2021. Much of this was also due to companies in the

portfolio spending more cash on re-building their inventories from

a low point in 2021 as supply chains eased, but at higher

component prices, due to inflation. This dynamic is confirmed by

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13

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

looking at the average growth of earnings per share, which excludes

working capital expenses, and which was +7% in the period. It is

perhaps worth mentioning that if recession starts to bite in 2023,

we may have to wait some time for these figures to improve

meaningfully. But we are confident that they will.

Regarding the final step, do nothing, it must be noted that as share

prices were volatile throughout the year, trading activity increased

significantly as we set out to take advantage of buying new positions

or increasing existing ones at lower valuations. This meant that

discretionary portfolio turnover, excluding any buybacks and the

investment of proceeds from new shares issued, was 42.8%

compared to just 9.5% in 2021. While this sounds like a high level,

it is worth noting that according to Morningstar, the average turnover

for actively managed equity funds tends to be above 60% and in

2020, the last year of such volatile markets, it was 86%.

Costs of dealing, including taxes, amounted to 0.03% (3 basis

points) of NAV in the period, slightly higher than the 0.02% incurred

in 2021. This may seem odd given there was much more

discretionary turnover this year, but the reason is that the overall

turnover of the fund, including the investment of the proceeds from

share issuance, which was very limited in 2022, was not that much

higher than last year. The Ongoing Charges Figure

1

was 0.9% of NAV

compared to 1.0% in 2021. This includes the Management Fee of

0.9%, applied to the market capitalisation of the Trust, which was

lower than the NAV for most of the year. Combined, this means the

Total Cost of Investment in the Trust was 0.93%.

1

Part of the turnover was generated by buying three companies

during the year after the decline in share prices resulted in attractive

valuations. Moncler, the Italian clothing company which designs and

produces high-end branded apparel, traces its roots back to 1952

and the invention of down-filled mountaineering coats, but fell on

hard times in the 1990s before being rejuvenated in the 2000s. It

now produces luxury items across several categories in clothing and

accessories. The company has until recently been expanding by

opening new Moncler branded stores, but this growth has been

boosted by acquiring the Stone Island brand in 2020. Stone Island

is another Italian luxury clothing company which has a similar profile

to Moncler’s in 2000, which is why management believe they can

greatly improve and grow the Stone Island brand, much as they have

done over the last 20 years with Moncler.

Since the inception of the fund, we have experienced success in

owning decentralised industrial conglomerates such as Halma and

Diploma. While the organic growth of these businesses is

acceptable, around the mid-single digit percent level, it is the

consistent, disciplined acquisition of high quality ‘bolt-on’ companies

that allow the groups to create substantial shareholder value over

time. In fact, we believe that in an era of higher interest rates and

lower asset prices, companies such as these, making frequent small

acquisitions – without significant additional debt - should stand to

benefit greatly. We acquired Addtech as it is another high quality

example of this type of company, with a very small head office

directing the allocation of the cash flow that is generated by its

independently managed businesses. Addtech, based in Sweden, has

140 subsidiaries and 3,000 employees grouped into five industrial

business areas including Industrial Process, Energy, Automation,

Components and Power Solutions. Itsorigins date back to 1906 and

it has had the same business concept for over 100 years. We can

therefore be confidentin its strategy over the next decade at least.

Finally, we bought a position in IDEX, an industrial company based

in the US. IDEX is another decentralised industrial conglomerate

which grows through small acquisitions, but this time in areas such

as pumps, meters and systems for high-value materials,

high-precision instrumentation for health and science industries, and

tools, valves and controls for the fire and rescue industry and other

applications, including clamping devices used on the Mars rover.

We also sold three companies in the period. The first was a US-based

boiler and heater manufacturer, AO Smith. While the company has a

very attractive US business operating in a tight oligopoly, its future

growth opportunities lie in areas with much more aggressive

competition, such as water heaters in China and water purification

in the US. For this reason, we became less optimistic on its ability to

sustain profitable growth and sold, fortunately before fears of

recession caused a significant decline in its share price.

The second company we sold was Wingstop. After the shares

troughed in the summer, the share price more than doubled into the

autumn, at which point they were trading at levels we no longer felt

comfortable with given the decline in cash flow the company was

experiencing post its pandemic boost. In addition, we were

concerned about the long-term CEO deciding to leave for ‘another

challenge’, a potential capital intensive investment into chicken

farming and an increasingly levered balance sheet.

Investment Manager’s Review

Strategic Report

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 on pages 78 to 79.

14

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Towards the end of the year, we also sold Ansys, a US company

producing simulation software. While we still appreciate the

dominant position it occupies in its software niche, maintained by

the most advanced and accurate physics simulation engines, we

have growing concerns about its frequent acquisition of companies

that are clearly producing little or no profit. In the three years prior

to our original investment in 2018, the company spent $29m per

year on acquisitions on average. In the three years since our

investment, the company has spent an average of $623m per year.

As a result, invested capital has increased 112% since 2018 while

operating profit is up only 12%, depressing return on capital

employed to below 10%. This indicates to us that the cost to sustain

its competitive position is perhaps greater than it first appeared.

The result of this activity 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 1973.

31 December 31 December

2022 2021

Sector (%) (%)

Information Technology 38% 44%

Industrials 23% 22%

Healthcare 15% 11%

Consumer Discretionary 13% 9%

Consumer Staples 4% 5%

Communication Services 3% 5%

Financials 3% 3%

Cash – Uninvested 1% 1%

Source: Fundsmith

Information Technology now has a lower weighting, mostly due to

the sale of Ansys. As we say every year, while the Information

Technology weighting appears large, we do not think of ourselves

as running a ‘tech fund’, because this is an MSCI defined sector

which includes a number of diverse businesses and end markets.

To illustrate this more clearly, we list below the companies that fall

into the sector definition, along with a more detailed business

description and country of listing.

Country of Business

Listing Description

Cognex United States Logistics Electrical

Equipment

Fortinet United States Cyber Security

Halma United Kingdom Safety and Environmental

Electrical Equipment

IPG Photonics United States High Powered Lasers

Nemetschek Germany Software - Construction

and Media

Paycom Software United States Software - Human

Resources

Qualys United States Cyber Security

Sabre United States Travel and Leisure

Simcorp Denmark Software - Asset

Management

Technology One Australia Software - Government

Institutions

Temenos Switzerland Software - Banks

Verisign United States Internet Domain

Management

Hopefully from this list it is possible to see that the companies have

a diverse range of end markets, and even the collection of software

companies provide software products to very different industries.

This serves to highlight the fact that we would not expect the

revenue trends of these companies to move in lock step through

economic cycles, as perhaps the single sector weighting might

suggest.

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15

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

While the size of the Industrials weight was little changed, Health

Care increased due to adding to existing positions, while Consumer

Discretionary increased from the addition of Moncler to the portfolio.

31 December 31 December

2022 2021

Country of Listing (%) (%)

USA 40% 47%

UK 17% 21%

Italy 10% 4%

Denmark 8% 5%

Australia 7% 7%

Switzerland 6% 7%

Germany 6% 6%

New Zealand 3% 2%

Sweden 2% –

Cash 1% 1%

Source: Fundsmith

The USA is the largest country by weighting but has decreased by

7 percentage points from the end of last year due to all three of the

companies sold from the portfolio being listed in the country. After

a decline in the UK weighting and an increase in Italy (again, due to

Moncler), the European weighting now appears more balanced than

it has done historically.

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, Europe increased slightly to become the

largest, with a decrease in US exposure now making North America

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.

31 December 31 December

2022 2021

Source of Revenue (%) (%)

Europe 39% 38%

North America 36% 38%

Asia Pacific 19% 19%

Eurasia, Middle East, Africa 4% 3%

Latin America 2% 2%

Given the importance of Environmental, Social and Governance

(ESG) issues in investing, we outlined our ESG approach in last

year’s report. Instead of repeating what was written there, it might

be more interesting for you to read about some of our engagements

with portfolio companies regarding ESG issues during the course of

the year. One of the most challenging situations experienced by our

companies this year was when Russia invaded Ukraine. IPG

Photonics was particularly affected because a third of their

employees were based in Russia, producing much of the

semi-finished goods being shipped to other countries for final

assembly. We were, of course, greatly concerned by this and

approached the company to discuss the matter. We were reassured

by the fact that the management team had swiftly determined and

begun executing a plan that would transfer all manufacturing out of

Russia within 12 months. We have since been tracking the progress

of this plan and are pleased to report that they have made

significant headway.

Another situation which immediately attracted our focus was the

announcement that the recently hired CEO of Domino’s Pizza Group

was leaving to re-join his previous employer, Whitbread, to become

CEO of that company. Our first call was to the Chairman of Domino’s

Pizza Group to express our frustration at this outcome. What had

driven him away - colleagues or company culture? Undue pressures

from the Supervisory Board? We were also eager to understand

whether the remuneration structure was motivating enough to keep

the right person in the job.

Once you find the managerial talent that you believe will create value

for shareholders, you want to be able to compensate them to a level

and in a method that keeps them in that role and working as

effectively as possible to increase the value of the company. Through

several further interactions with the company, including meetings

with the CEO, Financial Director and Investor Relations executive,

we came to the conclusion that neither the culture, Board or

incentive structure had pushed out the CEO, but he was simply

driven by his desire to manage a larger company, one where he had

already spent several years of his career, and already knew many

of the people that he would now be leading. There is therefore a

simple one-word explanation for the departure – ego – which

probably means that we need not worry about the company itself.

The search for a new CEO is ongoing and we will remain

shareholders in the interim.

Investment Manager’s Review

Strategic Report

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

16

Finally, we would like to once again thank all shareholders for their

support of Smithson Investment Trust. We acknowledge that this is

by far the worst period of ownership for most and as such will not

have been easy or comfortable. Perhaps a simple analogy for what

we are currently experiencing is to imagine the relationship between

our performance and the market as like a car being towed by an

erratic driver. There may be brief periods of smooth acceleration,

but for the rest of the time you will be subjected to periods of drift

when the rope goes slack, before being jolted forwards again when

the car reaches the end of the tether. The current period is clearly

one of the car drifting backwards, but to end up at the final

destination of superior long-term returns, it makes sense to still be

in the car when the rope snaps back.

While we hope that market conditions are more favourable in 2023,

we continue undiscouraged with our strategy of buying high quality,

growing companies. Although style drift – the act of becoming less

disciplined in the execution of your original strategy in an attempt

to make money in all periods – may sound attractive after a year

like 2022, it’s only a short while before your North Star becomes so

clouded by opportunism that you end up far away from a cohesive

strategy and no longer know what type of investments you are

looking for. Be assured, this will never happen at Smithson. As Mike

Tyson famously said, “Everyone has a plan ‘till they get punched in

the mouth”, but while we took plenty of punches this year, the plan

has survived. We will continue to strive to allocate your capital as

effectively as possible using the same long-term strategy, whatever

the environment.

Simon Barnard

Fundsmith LLP

Investment Manager

27 February 2023

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Investment Manager’s Review

Strategic Report

17

Strategic Report

Investments held as at 31 December 2022

Security Country of incorporation Fair value £’000 % of investments

Moncler Italy 136,953 5.7

Recordati Italy 112,061 4.7

Sabre USA 110,275 4.6

Verisign USA 109,101 4.6

Simcorp Denmark 102,126 4.3

Ambu Denmark 100,536 4.2

Fortinet USA 88,998 3.7

Masimo USA 88,998 3.7

Domino's Pizza Enterprises Australia 86,970 3.6

Fevertree Drinks UK 86,966 3.6

Top 10 Investments 1,022,984 42.7

Domino's Pizza Group UK 81,076 3.4

Rightmove UK 79,113 3.3

Geberit Switzerland 78,880 3.3

MSCI USA 77,423 3.2

Cognex USA 76,311 3.2

Equifax USA 75,777 3.2

Diploma UK 74,341 3.1

Nemetschek Germany 73,883 3.1

Verisk Analytics USA 73,539 3.1

Technology One Australia 70,703 3.0

Top 20 Investments 1,784,030 74.6

Temenos Switzerland 70,194 2.9

Fisher & Paykel Healthcare New Zealand 68,459 2.9

Rational Germany 64,203 2.7

IPG Photonics USA 63,626 2.7

Qualys USA 58,113 2.4

Addtech Sweden 51,686 2.2

Spirax-Sarco Engineering UK 51,381 2.1

Rollins USA 49,631 2.1

IDEX USA 47,396 2.0

Halma UK 45,817 1.9

Paycom Software USA 39,312 1.5

Total Investments 2,393,848 100.0

Investment Portfolio

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

18

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

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.

Investment Objective, Policy and Investment Methodology

Strategic Report

19

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Strategic Report

Investment Objective, Policy and Investment Methodology

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.

20

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

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.

Investment Objective, Policy and Investment Methodology

Strategic Report

21

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Strategic Report

Business Review

The Strategic Report on pages 2 to 31 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 page 2 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 for definitions of these

terms and an explanation of how they are calculated.

Net asset value total return against the benchmark

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 benchmark index.

The Company’s net asset value per share at 31 December 2022

was 1,410.7p and it reported a total loss after tax for the year of

£967.7 million (2021: £503.7 million profit), comprising a capital

loss of £972.0 million (2021: £512.1 million profit) and a revenue

profit of £4.4 million (2021: revenue loss of £8.4 million) (see

financial statements on pages 58 to 61). The net asset value total

return for the year to 31 December 2022 was -28.1%

1

and the

annualised net asset return for the period from listing on 19 October

2018 to 31 December 2022 was 8.5%

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 -8.7% and +7.4% respectively,

thus the Company underperformed the benchmark by

19.4percentage points for the year ended 31 December 2022 but

has outperformed the Index by 1.1 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 on pages 78 to 79.

22

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

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 2022 was

-35.2%

1

and the annualised share price total return for the period

from listing on 19 October 2018 to 31 December 2022 was +6.6%

1

,

underperforming the MSCI World SMID Cap Index reference

benchmark by 26.5 percentage points and 0.8 percentage points

respectively. The Company's share price moved from a premium to

net asset value at the start of the year to a discount to net asset

value. 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 and the average discount to net asset value for

the year to 31 December 2022 was 6.1%. From 1 January until late

February 2022, the Company’s shares had consistently traded at a

premium to the net asset value, before predominantly trading at a

discount to net asset value for the remainder of the year. 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, during the period the Company’s shares traded at a

premium to net asset value, the Company issued 5.4 million new

ordinary shares at an average premium to the prevailing net asset

value of 2.6%, raising net proceeds of £92.5 million. During the

period the Company’s shares traded at a discount to the net asset

value, the Company repurchased 5.7 million ordinary shares at an

average discount to the prevailing net asset value of 8.7%, for a cost

of £74.0 million (see page 60). Together, the share issues and

repurchases generated a benefit to net asset value per share of

approximately £7.4 million net of costs. The decision and timing of

any share issuance and/or buy-back is at the discretion of the Board.

As at 31 December 2022, the discount of the Company’s share

price to the net asset value per share was 7.3%

1

.

The Directors intend to seek renewal at each Annual General

Meeting of their authority to allot shares or to buy back shares with

a view to managing the premium/discount as well as creating

further shareholder value. Shares will only be issued at a premium

to net asset value and bought back at a discount to net asset value.

If, after the end of the fourth financial year of the Company’s

existence (being 31 December 2022) or any subsequent year, the

Company’s shares have traded, on average, at a discount in excess

of 10 per cent. of net asset value per share in any such year, the

Directors will consider proposing a special resolution at the

Company’s next Annual General Meeting that the Company ceases

to continue in its present form. If such a vote is proposed and

passed, the Board will be required to formulate proposals to be put

to shareholders within four months to wind up or otherwise

reconstruct the Company, having regard to the liquidity of the

Company’s underlying assets. Any such proposals may incorporate

arrangements which enable investors who wish to continue to be

exposed to the Company’s investment portfolio to maintain some

or all of their existing exposure.

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. The Directors regard the ongoing

charges ratio as a measure of the regular recurring costs of running

an investment company. Expressed as a percentage of average net

asset value, the annualised ongoing charges ratio for the year was

0.9% (2021: 1.0%)

1

. The primary contribution to this fall in the

Company's ongoing charges ratio was that the Investment

Manager's fees were based upon the Company's market

capitalisation which fell by a greater degree than the Company's net

asset value. 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 on pages 78 to 79.

Strategic Report

Business Review

23

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

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. 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. An

annual formal review of the risk procedures and controls in

place at the Investment Manager and other key service

providers is performed. Emerging risks are actively 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 secondary impacts from the COVID pandemic 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 impact from

the Ukraine conflict.

• 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 updates which are relevant

to the Company; 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 may not achieve its investment objective.

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.

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 31 companies

with details of the geographic and sector weightings given in the

Investment Manager’s Review.

Risk Management

Strategic Report

24

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

2. Market risks

Price movements 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 conflict in Ukraine) 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. 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, and the performance of the key

service providers is reviewed annually by the Management

Engagement Committee. Cyber risk management questions were

incorporated in this review to confirm the existence and application

of cyber security controls and procedures. The Company’s key

service providers report periodically to the Board on their business

continuity plans and procedures. The Board monitors the adequacy

of controls in place at the key service providers and their planned

response to an extended period of disruption, to ensure that the

impact to the Company is limited. Each key service provider was

asked to present reports on their actions and responses, all of which

were entirely satisfactory, and there was no noticeable change in

any of the key services provided.

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 Management Engagement

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.

Strategic Report

Risk Management

25

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

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), therefore their

interests and the Company’s shareholders are more aligned. 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.

Risk Management

Strategic Report

26

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Viability Statement

In accordance with the UK Corporate Governance 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 war in Ukraine, 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 2022 the

Company had net assets of £2,418 million of which £2,394 million

was held in listed investments and £24 million in cash (see page 59).

At 31 December 2022, 91.5% of the Company's portfolio could be

liquidated within 30 days. The Board therefore has substantial options

to manage the Company’s ongoing solvency.

The Board will consider putting a continuation vote to shareholders if

in any year the Company’s share price trades at an average discount

of 10% or more to net asset value. During 2022, the average discount

to NAV was 6.1%, the first period of a sustained discount since the

launch of the Trust. The Board seeks to address the level of discount

through the use of share buybacks and the Company intends to

continue with its current programme of regular market purchases

whilst the shares trade at a material discount to net assetvalue.

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 premium/discount management programme described

above will continue to operate in such way, that the Board will

not elect to put a continuation vote to shareholders;

• 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.

26

Strategic Report

Viability Statement

27

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Section 172 of Companies Act 2006 Statement

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 enables the

Board to consider the potential impact of strategic decisions on

each stakeholder group during the decision-making process.

By 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 environment.

During the period under review, the Board believes that it has acted in

good faith and discharged its duty per section 172 of the Companies

Act 2006 (“s172”), to promote the success of the Company for the

benefit of its members as a whole and having regard to the interests

of stakeholders and the factors set out in s172. The Board performed

its role as outlined in the schedule of matters reserved for the Board

and taking into account the interests of the key stakeholders.

Company Culture and Values

Culture

The culture of the Company is set by the Board and is based on the

values of the Company summarised below. The Board seeks to apply

these values in all its dealings with its stakeholders and encourages

the same values to be adopted by its key service providers.

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.

As part of its service provider annual review, the Board seeks

assurance of high standards from its service providers in relation to

their policies with regard to governance including whistleblowing, tax

evasion, human rights, modern slavery and bribery.

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.

Company Sustainability and Stakeholders

As part of its work to evaluate its principal risks, the Board identified

its key stakeholders, as applicable for the investment company,

which can be summarised as follows:

• Investors;

• Investment Manager;

• Other key service providers; and

• Investee companies.

Examples below provide an overview of how the Board considered

the factors set out in s172, including how its engagement with the

Company’s key stakeholders helps the Board in its decision-making.

Strategic Report

Non-Financial Information

28

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Stakeholder Management

To understand the views of the Company’s key stakeholders, the

Board aims to ensure there is a regular and sustained engagement,

which is to be taken into consideration in its decision-making and

discussions.

Investors

Communications are key to establishing a meaningful relationship

with our shareholders. 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.

The Company raised £822 million in its initial public offering (“IPO”)

in October 2018, which was the largest amount that had been

raised by any investment trust Initial Public Offering (‘IPO’) on the

London Stock Exchange to that date.

From inception until April 2022 the Company continuously issued new

shares at a premium to NAV (net of all costs). The Company’s shares

began the year trading at a 3% premium to NAV but in late February

the shares began trading at a discount, ending the year at a discount

of (7.3)%

1

. The average discount across the year was (6.1)%, the first

period of a sustained discount since the launch of the Trust. In

response to the emergence of the discount, the Board, in consultation

with its advisers and the investment manager, has sought to address

the situation through the use of share buybacks. The Company started

to buy back shares at the end of April, and by the end of December

2022 had acquired 3.2% of the total shares in issue. A further 0.6%

has since been bought back and at 22 February 2023, the discount

was 8.6%. The Company intends to continue with its current

programme of regular market purchases whilst the shares trade at a

material discount. As a matter of law, the Company is only permitted

to fund purchases of its own shares out of its distributable reserves

or the proceeds of a fresh issue of shares. To ensure that a lack of

distributable reserves does not prevent the Board in the future from

continuing share buybacks when they feel they are appropriate, the

Board at a General Meeting held 6 February 2023, obtained the

approval of shareholder to apply to the High Court to reduce the

Company's share premium by £500million. The reduction, if approved

by the High Court, will result in a corresponding increase in the

Company's distributable reserves to facilitate future buybacks. All

shares purchased are held in Treasury and will only be reissued at a

premium, net of all costs. An application has been made to the High

Court to sanction the capital reduction.

The Board is seeking to renew its authorities to issue and buyback

shares at the Company’s AGM (for further details, please see

pages 35 to 36) with a view to managing the premium/discount and

to continue to create value for shareholders. The Board is mindful

that there should be an active, liquid market in the Company’s

shares. As a closed-ended fund listed on the Premium segment of

the main market, shareholders should always be able to exit through

the stock market. The Board recognises the importance of

shareholders being able to sell at a price not disadvantageous to

them and the premium/discount to net asset value at which the

Company’s shares trade is monitored at all times.

The Board encourages communications with its Investment

Manager and key service providers to be open and transparent, with

all parties working together in a collaborative manner at the same

time as the Board exercising oversight and challenge (further

information can be found in the Business Review section, describing

the Key Performance Indicators). 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.

During the year the Board took the decision to increase the size of

the Board to four non-executive Directors, with Denise Hadgill being

appointed effective 1 June 2022. This decision was taken as part

of the Board’s succession planning and to broaden the experience

and diversity of the Board for the benefit of the Company and its

shareholders as a whole.

The Company and Investment Manager are seeking to promote an

investor base that is interested in a long-term holding in the Company.

The Board, through the Company’s broker and the Investment

Manager, maintains regular contact with shareholders and welcomed

shareholders in May 2022 to the first in person AGM since the IPO

and the lifting of COVID-19 restrictions. It is the intention that the full

Board will attend the forthcoming AGM and the Chairman will chair

the meeting. Shareholders have the opportunity to attend the AGM

where they can question the Board and representatives of the

Investment Manager. The Chairs of the Board’s committees will also

Strategic Report

Non-Financial Information

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 on pages 78 to 79.

29

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

normally attend the AGM, to engage with shareholders on significant

matters related to their areas of responsibility.

The Directors welcome the views of all shareholders and place

considerable importance on maintaining open dialogue with them.

Shareholders wishing to contact the Chairman, or any other member

of the Board, may do so at any time by writing to the company

secretary. Alternatively, the Chairman can be emailed at the

following address: smithsonchairman@fundsmith.co.uk.

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 the investors’

views on certain resolutions.

Shareholder feedback is discussed in Board meetings with the

broker and Investment Manager, whether received directly to the

Board or through the Investment Manager and broker’s shareholder

meetings and the Board is pleased that the feedback received

remained positive throughout the period. The Board also received

a number of questions on the Company’s performance and strategy

ahead of and during a question and answer session at the AGM

which were either addressed in the manager’s presentation or

responded to directly. The Company’s shareholder engagement

strategy and details of shareholder communications can be found

on page 40.

In addition to this, the Investment Manager engages with

shareholders at regular webinars, where questions are received and

answered. The majority of the questions are around the

fundamentals of the investee companies and whether they continue

to be congruent with the Company’s investment philosophy. In all

cases it is noted that this is the case, with specific attention paid

towards regular meetings with the investees’ executive management

and ensuring that investment criteria are being met in all areas.

Investment Manager

As explained above, the Company’s business model is such that it

has no employees and relies on services provided by third party

service providers to manage the Company’s operations. 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 on page 33.

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. Additionally,

the Board held a strategy session in November 2022 at which the

Board and Investment Manager discussed in detail the performance

of the Company’s portfolio of investments and the investible

universe for the Company. The Board and Investment Manager

along with the broker also discussed at the strategy session the

investment trust market and the Company’s position within it, the

Company’s portfolio structure as well as ESG considerations

(including diversity) and shareholder engagement strategies.

A representative of the Investment Manager also attends each

quarterly Board meeting and most ad hoc meetings.

The Investment Manager’s remuneration is based on the market

capitalisation of the Company which aligns the manager’s interests

with those of shareholders. Furthermore, partners and employees

of the Investment Manager are significantly invested in the Company

as disclosed in note 17 of the financial statements; further aligning

the Investment Manager’s interests with those of the shareholders.

The Investment Manager paid costs of £5.1 million in respect of the

Company’s IPO and the Placing Programme prospectus issued in

2020. This means that shareholders’ investment was not

discounted by the cost of the IPO and that the Company only gains

from its ordinary share issues, as prospectus costs were met. This

is unusual for investment trusts and is a testament to the

relationship which the Company enjoys with its Investment Manager.

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 on pages 45 to 46.

Other key service providers

In ensuring the smooth operation of the Company, the Board also

monitors the performance of other key service providers such as

the fund administrator, depositary and custodian (please see the

Management Engagement Committee Report) and maintains

regular contact through direct reports at Board meetings or through

the company secretary to ensure there is open dialogue and good

relationship management at the Board level. Additionally, in view of

the operational challenges and restrictions caused by the COVID-19

pandemic, the Board continues to receive regular updates and

Strategic Report

Non-Financial Information

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 on pages 78 to 79.

30

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

assurance on the operational effectiveness of its key service

providers, taking this feedback into consideration when assessing

the Company’s risks. The Board was pleased to note its service

providers continued to operate effectively.

In maintaining the Company’s reputation and high standards of

business conduct, the Board is provided with regular reports from

the Company’s broker and company secretary who alert the Board

to recent and proposed changes in regulation and market practice,

as well as any likely reputational threats which, in turn, influence

the Board’s decision-making process. The Company’s corporate

values, established to manage its business relationship with its

stakeholders, are stated above and the Company’s approach on

anti-bribery and prevention of tax evasion can be found below and

on the Company’s website at www.smithson.co.uk. The Board also

seeks assurance of high standards from its service providers as

regards governance including whistleblowing, tax evasion, and

bribery as part of its service provider annual review. The Board also

periodically reviews the market rates for services provided, to ensure

that the Company continues to receive high quality service at a

competitive cost.

Investee companies

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 Company is a

long-term investor (please see Owner’s Manual at the Company’s

website at www.smithson.co.uk) and the Investment Manager’s

Review sets out how the Investment Manager considers ESG

matters and explains and summarises their approach and

engagement with investee companies. Fundsmith are signatories of

the United Nations Principles for Responsible Investment and their

ESG approach is overseen by the Fundsmith Stewardship and

Sustainability Committee, on which the Company’s manager, Simon

Barnard, sits. The Board is satisfied that the Investment Manager

is actively managing ESG risks and is diligent in its stewardship

responsibilities.

The Company recognises the increased interest in reporting on ESG

matters and supports the Association of Investment Companies

(“AIC”) initiative to provide information on investment companies’

ESG practices in a centralised database and accordingly has

submitted its own commentary in that regard and shareholders can

access the statement on the Company’s information page of the AIC

website (www.theaic.co.uk) and on the Company’s website at

www.smithson.co.uk.

ESG initiatives of the investee companies are included in the

Investment Manager’s Review on page 15.

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

states that 85% of recognised income 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.

Environmental Matters

As mentioned earlier, the Company is an investment company. As

such, it does not have any physical assets, property, employees or

operations of its own. The Company does not provide goods or

services in the normal course of its business and nor does it have

customers. In consequence, the Company has no greenhouse gas

emissions to report from its operations. As the Company has no

material operations and therefore has little to no energy use, it falls

below 40,000kWh of energy use and is therefore exempt from the

disclosures under the Companies (Directors’ Report) and Limited

Liability Partnership (Energy and Carbon Report) Regulations 2018

or Streamlined Energy and Carbon Reporting criteria. The Investment

Manager evaluates environmental matters concerning investee

companies as summarised in the Investment Manager’s Review.

Due to an outsourced business model, the Company has no direct

environmental responsibilities, but it does have such through its

investment portfolio.

Strategic Report

Non-Financial Information

31

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

ESG Integration

The Company 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 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. The Company

builds an investable universe of, as we define them, “good

companies”. Good companies are those that can generate a

sustainable high return on invested capital over the full business

cycle and have the ability to reinvest these returns to generate

consistent growth.

Please see ESG Integration document and Owner’s Manual at the

Company’s website at www.smithson.co.uk and the Investment

Manager’s Review to read more on how the Investment Manager

considers environmental matters.

Exercise of Voting Powers and Stewardship Code

The Company and the Investment Manager support the UK

Stewardship Code issued by the Financial Reporting Council. Voting

on investee company shareholder resolutions is undertaken by the

Investment Manager. A copy of Fundsmith’s Responsible Investment

Policy and a report on its voting at investee shareholder meetings

in 2021 and the first half of 2022 can be found on the Investment

Manager's website at www.fundsmith.co.uk. During the year to

31 December 2022, 403 votes were cast by the Investment

Manager of which 97.8% were voted in favour of the resolution and

2.2% against. Of the 403 votes cast, 47 related to management

remuneration and the Investment Manager voted against the

company management on 17% of these.

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.

Conclusion

The Board is mindful of the directors’ duties as described by s172

in considering the interests of stakeholders when deliberating all

important decisions. Work of the Board and its Committees is

described in the Governance Report on pages 37 to 40.

Strategic Report

The Strategic Report set out in the Annual Report was approved by

the Board of Directors on the 27 February 2023.

On behalf of the Board

Diana Dyer Bartlett

Chairman

27 February 2023

Strategic Report

Non-Financial Information

32

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Board of Directors

The directors who held office at the date of this report are:

Diana Dyer Bartlett

(Chairman)

Appointed 14 September 2018

Diana Dyer Bartlett was Chairman of the Audit Committee from the

Company’s IPO in 2018 until 1 March 2022 when she was

appointed Chairman of the Board. After qualifying as a chartered

accountant with Deloitte Haskins & Sells, Diana spent five years in

investment banking with Hill Samuel Bank. Since then, she has held

a number of roles as finance director of various venture capital and

private equity backed businesses and listed companies involved in

software, financial services, renewable energy and coal mining. She

was also company secretary of Tullett Prebon plc and Collins Stewart

Tullett plc. Diana is currently a non-executive director and Chairman

of the Audit Committee of Mid Wynd International Investment Trust

plc and Schroder British Opportunities Trust plc.

Lord St John of Bletso

(Audit Committee Chairman)

Appointed 14 September 2018

Lord St John has been an active Member of the House of Lords

since 1978. He serves as non-executive Chairman of Strand Hanson

Ltd, Integrated Diagnostics Holdings Plc and Yellow Cake plc. He

also serves as a non-executive director of Gulf Marine Services plc.

He has advisory roles with GeoBear Engineering, Bell Technologies,

Betway and Wet Holdings. He worked for almost 20 years in the City

with Natwest Securities, Smith New Court and Merrill Lynch. He

qualified and practised as a lawyer in South Africa after graduating

with BA, BsocSc, Bproc and LLM degrees.

Jeremy Attard-Manche

(Management Engagement Committee Chairman)

Appointed 1 March 2022

Mr Attard-Manche was a partner at Tell Investments, which he jointly

founded in 2002, and managed three Cayman-registered hedge

funds, with total assets under management of c. EUR 1 billion. Prior

to this, he worked at James Capel and then held a number of roles

with Merrill Lynch including Managing Director responsible for all

hedge fund distribution in Europe (including cash, equity-linked and

prime brokerage products) and as head of the London-based team

of Pan European specialist and generalist research salesmen. He is

a non-executive Director of RQ Ratings Ltd, Evan Evans Group Ltd

and a Managing Trustee of the Plan with Grace Trust.

Denise Hadgill

Appointed 1 June 2022

Mrs Hadgill was formerly a Managing Director at BlackRock and Head

of the UK Product Specialist Group and prior to this, a UK Equity Fund

Manager at Schroder Investment Management Limited. She is a

non-executive director and Chair of the Investment Committee of

PGMutual, a non-executive director of Henderson Diversified Income

Trust plc, and a non-executive director of Chelverton UK Dividend

Trust plc and its wholly owned subsidiary, SDV 2025 ZDP plc.

All of the directors are members of the Audit Committee and the

Management Engagement Committee.

Governance Report

Board of Directors

33

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

The Directors present their report on the affairs of the Company,

together with the audited financial statements and the Independent

Auditor’s Report for the year to 31 December 2022. The Corporate

Governance Report on pages 37 to 40 forms part of this report.

Disclosures relating to performance, future developments and

viability and risk management can be found in the Strategic Report

on pages 2 to 31 and are incorporated in this report by reference.

Legal and Taxation Status

The Company is registered as a public limited company in England

and Wales (Registered Number 11517636) and is an investment

company within the terms of Section 833 of the Companies

Act 2006 (the “Act”). Its shares are listed on the premium segment

of the Official List and traded on the main market of the London

Stock Exchange. The Company is an approved investment trust

under sections 1158 and 1159 of the Corporation Tax Act 2010

and Part 2 Chapter 1 of Statutory Instrument 2011/2999.

TheDirectors are of the opinion that the Company has conducted

its affairs so as to be able to retain such approval.

Investment Management

The Company’s investments are managed by Fundsmith LLP. Simon

Barnard and Will Morgan are the day-to-day fund managers and

Terry Smith oversees their activities as Chief Investment Officer.

Fundsmith’s services are provided pursuant to an agreement

entered into on 17 September 2018 and include, amongst other

things, advising on how monies are invested or divested, how rights

conferred by the investments should be exercised, how income

should be collected and on market trends etc. The Investment

Manager fulfils the regulatory role of AIFM.

The Investment Manager is entitled to receive a fee from the

Company which is an amount equal to 1/365 multiplied by 0.9% of

the market capitalisation of the Company accruing daily, but payable

monthly in arrears. The Investment Management Agreement may

be terminated by either party on twelve months’ notice.

The Management Engagement Committee has reviewed the

continuing appointment of the Investment Manager. Further details

of the review and conclusions are provided at the Management

Engagement Committee Report.

Fund Administration, Depositary and Custody

Responsibility for the Company’s fund administration, cash

monitoring and processing transactions of the Company’s

investments is with Northern Trust Global Services and safeguarding

the Company’s assets was the responsibility of Northern Trust

Global Services SE both of whom were appointed on 17 September

2018. As a result of UK regulatory changes brought about by the

UK’s decision to leave the EU, depositary services were transferred

from Northern Trust Global Services SE on 1 September 2021 to

Northern Trust Investor Services Limited, a UK incorporated entity

established by the Northern Trust Company to provide depositary

services to UK companies. The Depositary provides the following

services:

• safekeeping and custody of the Company’s custodial

investments and cash;

• processing of transactions and foreign exchange services;

• taking reasonable care to ensure that the Company is managed

in accordance with the AIFMD, the FUND sourcebook and the

Company’s articles of association in relation to the net asset

value per share and the application of income of the Company;

and

• monitoring the Company’s compliance with investment

restrictions and leverage limits set in its offering documents.

Results and Dividends

The Company reported (see page 58) a total loss after tax for the

year of £967.7 million (2021: £503.7 million profit), comprising a

capital loss of £972.0 million (2021: £512.1 million profit) and a

revenue profit of £4.4 million (2021: revenue loss of £8.4 million).

The Company had prior year revenue losses of £11.0 million and

therefore at 31 December 2022 the Company’s Revenue Reserve

was a loss of £6.6 million. The Directors did not pay an interim

dividend and are not proposing a final dividend for the period ended

31 December 2022.

This is consistent with the Company’s policy of focusing on long-term

capital growth and only declaring dividends to the extent required

to maintain the Company’s tax status as an investment trust.

Governance Report

Report of the Directors

34

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Going Concern

The Directors have adopted the going concern basis in preparing

the financial statements. The following is a summary of the

Directors’ assessment of the going concern status of the Company,

which included consideration of the risks and impact of the

macroeconomic backdrop such as uncertainty over inflation and

higher interest rates along with secondary effects of the COVID-19

pandemic and the continuing war in Ukraine, and which should be

read in conjunction with the Viability Statement.

The Directors have a reasonable expectation that the Company has

adequate resources to continue in operational existence for at least

twelve months from the date of this document. In reaching this

conclusion, the Directors have considered the liquidity of the

Company’s portfolio of investments as well as its cash position,

income and expense flows. The Company’s net assets at

31December 2022 were £2,418 million (2021: £3,367 million).

As reported on pages 58 to 61, at 31 December 2022, the Company

held £2,394 million in listed investments (2021: £3,339 million)

and had cash of £24.6 million (2021: £32.1 million). The Company

has no borrowings. The Company had dividend income net of

withholding taxes of £27.6 million in the year to 31 December 2022

(2021: £19.1 million). The total revenue operating expenses for the

year ended 31 December 2022 were £23.5 million (2021:

£27.5million) and the Company had a revenue profit of £4.4 million

(2021: loss of £8.4 million). Therefore, at the date of approval of

this document, based on the aggregate of investments and cash

held, the Company has substantial operating expenses cover.

Leverage

For the purposes of the Alternative Investment Fund Managers

(AIFM) Directive, leverage is any method which increases the

Company’s exposure, including the borrowing of cash and the use

of derivatives. The Company did not employ any leverage during the

year ended 31 December 2022.

Financial Instruments

The Company’s financial instruments comprise its investment

portfolio, cash balances and debtors and creditors that arise directly

from its operations such as sales and purchases awaiting

settlement and accrued income. The financial risk management

objectives and policies arising from its financial instruments and

the exposure of the Company to risk are disclosed in note 15 to the

financial statements and the Company’s hedging policy on page 18.

Directors’ Indemnities and Directors’ and Officers’

Liability Insurance

The Directors and officers of the Company are entitled to be

indemnified against all losses and liabilities which they may sustain

in the execution of the duties of their office, except to the extent that

such an indemnity is not permitted by sections 232 or 234 of the

Companies Act. Subject to sections 205(2) to (4) of the Companies

Act, the Company may provide a Director with funds to meet their

expenditure in defending any civil or criminal proceedings brought

or threatened against them in relation to the Company.

The Company may also provide a Director with funds to meet

expenditure incurred in connection with proceedings brought by a

regulatory authority.

The Company’s Directors are covered by Directors’ and Officers’

Liability insurance.

Investment Manager’s Interests

As at 31 December 2022, Terry Smith and other founder partners

and key employees of the Investment Manager directly or indirectly

and in aggregate, held 1.7% (2021: 1.7%) of the issued share

capital of the Company.

Significant Interests

As at the year end and at the date of this report, the following

investors had declared a notifiable interest in the Company’s voting

rights:

31 December 2022 22 February 2023

% of % of

issued issued

No of share No of share

shares capital shares capital

Brewin Dolphin Limited 7,041,512 4.10% 7,041,512 4.13%

Rathbones* 5,739,467 3.35% 5,739,467 3.37%

* Rathbone Investment Management Ltd and Rathbone Investment Management

International Ltd

Governance Report

Report of the Directors

35

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Share Capital and Voting Rights

As at 22 February 2023 (the latest practical date before publication

of the Annual Report) the Company’s issued share capital consisted

of 177,107,958Ordinary Shares. There are 6,750,000 treasury

shares in issue. Therefore, the total voting rights in the Company as

at 22 February 2023 were 170,357,958.

The holders of the ordinary shares are entitled to receive, and to

participate in, any dividends declared in relation to the ordinary

shares. On a winding-up or a return of capital by the Company, the

holders of ordinary shares are entitled to all of the Company’s

remaining net assets after satisfaction of the Company’s liabilities.

The ordinary shares carry the right to receive notice of, attend and

vote at general meetings of the Company. The consent of the

holders of ordinary shares is required for the variation of any rights

attached to the ordinary shares. Holders of ordinary shares have

one vote per share held.

There are no restrictions concerning the transfer of securities in the

Company, no special rights with regard to control attached to

securities, no restrictions on voting rights, and no agreements

between holders of securities regarding their transfer which are

known to the Company.

The Board is not aware of any significant agreements that take

effect, alter or terminate upon a change of control of the Company

following a takeover bid, nor any agreements with the Company and

its Directors for compensation for loss of office that occurs because

of a takeover bid.

During the year, the Company issued 5.4 million ordinary shares at

an average price of £17.21, raising net proceeds of £92.5 million.

The average premium to the prevailing net asset value at which

these new shares were issued was 2.62%. Also, during the year the

Company bought back to hold in Treasury 5.7 million ordinary

shares at a total cost of £74.0 million. The average discount to the

prevailing net asset value at which these new shares were

purchased was 8.66%. The share issues and buybacks represented

3.1% and 3.3% of the Company’s issued share capital at the start

of the year. For more details, please see the Statement of Changes

in Equity in the financial statements.

In the period from 31 December 2022 to 22 February 2023, (the

latest practicable date before publication of the Annual Report), a

further 1,050,000ordinary shares have been bought back at an

aggregate net cost of raising aggregate net proceeds of

£15.0million. The average price at which these new shares were

purchased was £14.18.

Charitable and Political Donations

There were no charitable or political donations made during the year

to 31 December 2022 (2021: nil).

Board Appointments, Re-election and Removal

All appointments to the Board and re-elections of Directors and

removal of Board members are carried out in accordance with the

Companies Act and the Company’s Articles of Association.

In accordance with best practice and developing Corporate

Governance, Directors stand for re-election on an annual basis.

Annual General Meeting

The Company’s Annual General Meeting (“AGM”) will be held at

1.00pm on 27 April 2023 at the Max Rayne Auditorium, The Royal

Society of Medicine, 1 Wimpole Street, Westminster, London

W1G0AE. The Notice of AGM will be sent to all shareholders entitled

to receive such notice.

The Board supports the principle that the AGM be used to

communicate with private investors. It is the intention that the full

Board will attend the AGM and the Chairman will chair the meeting.

Shareholders can attend the AGM where they will have opportunity

to question the Chairman, the Board and representatives of the

Investment Manager.

Only members on the register of members of the Company as at close

of business on 25 April 2023 (or two days before any adjourned

meeting, excluding non-business days) will be entitled to vote at the

AGM. Any proxy must be lodged with the Company’s registrars or

submitted to CREST by 25 April 2023 at 1.00 p.m. or at least 48hours,

excluding non-business days, before any adjourned meeting.

Shareholders will hear a presentation by the Investment Manager

Simon Barnard, which will also be made available on the Company’s

website at www.smithson.co.uk after the meeting.

Special resolutions dealing with the disapplication of pre-emption

rights on the allotment of shares, the repurchase of shares, and to

convene general meetings other than annual general meetings on

no less than 14 days’ notice will be put to the AGM.

Governance Report

Report of the Directors

36

Authority to issue shares

At the Annual General Meeting held on 3 May 2022, the Board was

granted authority to issue a total of up to 35,386,590 ordinary

shares (being 20% of the ordinary shares in issue as at 10 March

2022, the latest practicable date before publication of the Notice

of AGM), without pre-emption rights. Since the 2022 AGM,

noordinary shares have been issued under the authorities granted.

The authorities expire at the 2023 AGM. The Board intends to seek

authority to issue without pre-emption rights, up to a further 20%

of its issued share capital as at 22 February 2023 (the latest

practicable date before publication of the Notice of AGM) at the

forthcoming Annual General Meeting. Shares will only be issued at

a premium to the then prevailing net asset value.

Authority to Buy back shares

The Board was granted authority at the 2022 Annual General

Meeting, to buy back up to 26,522,250 ordinary shares,

representing 14.99% of the ordinary shares in issue as at 10 March

2022, the latest practicable date before publication of the Notice

of AGM. 5.7 million ordinary shares were bought back during the

year to 31 December 2022 and 1,050,000 since the year end up

to the date of this report. The Board recommends that a new

authority to purchase up to 25,536,657 ordinary shares which

represents 14.99% of the ordinary shares in issue at 22 February

2023 (the latest practicable date before publication of the Notice

of AGM) be granted and a resolution to that effect will be put to the

AGM. Any ordinary shares purchased will either be cancelled or, if

the Directors so determine, held in treasury. Shares will only be

bought back at a discount to the then prevailing net asset value.

Convening General meetings

The Board seeks shareholder approval for the Company to hold

General Meetings (other than the Annual General Meeting) at 14

clear days’ notice. The Company will only use this shorter notice

period where it is merited by the purpose of the meeting.

The Board considers that all the resolutions put forward at the AGM

are in the best interests of the shareholders as a whole. Accordingly,

the Board unanimously recommends to the shareholders that they

vote in favour of the resolutions to be proposed at the forthcoming

AGM as the Directors intend to do in respect of their own beneficial

holdings. The explanatory notes to the Notice of AGM describe each

resolution and explain the reasons for the Board’s recommendation.

Information to be disclosed in accordance with

Listing Rule 9.8.4

Listing Rule (“LR”) 9.8.4 requires the Company to include certain

information in a single identifiable section of the Annual Report or

a cross reference table indicating where the information is set out.

The Directors confirm that there are no disclosures to be made in

this regard, other than in accordance with LR 9.8.4(7) relating to

details of the allotment of shares for cash, the information of which

is detailed on page 70 under Share Capital.

Events after the Reporting Period

Since 31 December 2022 and up to 22 February 2023, (the latest

practicable date before publication of the Annual Report), the

Company has bought back 1,050,000 ordinary shares for a net cost

of £15.0 million.

On 6 February 2023, shareholder approval was obtained to apply

to the High Court to reduce the Company's share premium by

£500million. The reduction, if approved by the High Court, will

result in a corresponding increase in the Company's distributable

reserves to facilitate future buybacks.

Auditor Information

Each of the Directors at the date of the approval of this report

confirms that:

(i) so far as the Director is aware, there is no relevant audit

information of which the Company’s auditor is unaware; and

(ii) the Director has taken all steps that he/she ought to have taken

as a Director to make himself/herself aware of any relevant

information and to establish that the Company’s auditor is

aware of that information.

This confirmation is given and should be interpreted in accordance

with the provisions of Section 418 of the Companies Act 2006.

In accordance with Section 489 of the Companies Act 2006,

aresolution to re-appoint Deloitte LLP as the Company’s auditor will

be put forward at the forthcoming Annual General Meeting.

On behalf of the Board

Diana Dyer Bartlett

Chairman

27 February 2023

Governance Report

Report of the Directors

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

37

The Corporate Governance Report forms part of the Report of the

Directors.

The Listing Rules and the Disclosure Guidance and Transparency

Rules of the UK Listing Authority require listed companies to disclose

how they have applied the principles and complied with the

provisions of the UK Corporate Governance Code, as issued by the

Financial Reporting Council (“FRC”) in 2018 (“UK Code”). The UK

Code can be viewed on the FRC’s website (www.frc.org.uk).

The Board has also considered the Principles and Provisions of the

Association of Investment Companies Code of Corporate

Governance, as issued in 2019 (“the AIC Code”). The AIC Code is

available on the AIC website (www.theaic.co.uk). It includes an

explanation of how the AIC Code adapts the Principles and

Provisions set out in the UK Code to make it relevant for investment

companies.

The Financial Reporting Council which issues the UK Code, has

confirmed that, by following the AIC Code, boards of investment

companies will be meeting their obligations under LR 9.8.6 of the

Listing Rules. The Board therefore considers that as an investment

company, reporting against the Principles and Provisions of the

AICCode provides more relevant information to shareholders and

meets its obligations under the UK Code and associated disclosure

requirements under LR 9.8.6 of the Listing Rules.

The Board considers that the Company has complied with the

recommendations of the AIC Code except for the provisions relating

to the appointment of a senior independent director and the need

for Remuneration and Nomination committees.

As the Board is small in number, having just four Board members,

the Board does not consider that it is necessary to appoint a senior

independent director as the role can be performed by the Board as

a whole. Shareholders are invited to contact any of the Directors,

if they have any concerns which they wish to raise. The Audit

Committee Chairman is responsible for leading the performance

review of the Chairman instead of a senior independent director and

the Board as a whole is responsible for agreeing the succession plan

for the Chairman. The Board as a whole fulfils the function of the

Nomination Committee and the Remuneration Committee and

therefore has not reported further in respect of these provisions.

The UK Code additionally includes provisions relating to the role of

the chief executive, executive directors’ remuneration and the need

for an internal audit function. The Company has no chief executive

or other executive directors and therefore has no need to consider

the remuneration of executive directors.

In addition, the Company does not have any internal operations and

therefore does not maintain an internal audit function. However, the

Audit Committee considers the need for such a function at least

annually (see page 43 for further information).

The Chair of the Board should not be a member of the Audit

Committee per the UK Code. However, the AIC Code permits the

Chair to be a member of, but not chair the Audit Committee if they

were independent on appointment. The Chairman was independent

on appointment, and in view of the size of the Board, the Directors

feel it is appropriate for the Chairman to be a member of the Audit

Committee.

The Board

The Board has overall responsibility for the effective stewardship for

the Company’s affairs. Its primary responsibility is to promote the

long-term sustainable success of the Company, generate value for

shareholders and have regard to stakeholder interests. It also

establishes the Company’s purpose, values and strategy, and

satisfies itself that these and its culture are aligned. It has a number

of matters formally reserved for its approval including strategy,

investment policy, gearing, treasury matters, dividend and corporate

governance policy. The Board approves the financial statements,

revenue budgets and reviews the performance of the Company.

Acopy of the matters reserved to the Board is available from the

company secretary or on the Company’s website at

www.smithson.co.uk. Full and timely information is provided to the

Board to enable the Board to function effectively and to allow

Directors to discharge their responsibilities.

The Board considers the balance of skills, knowledge, diversity

(including gender and ethnicity) and experience, amongst other

factors when reviewing its composition and appointing new

Directors and encourages applications from candidates from a

broad range of background and experience and will seek to appoint

the most suitable candidate. The Board has considered the

recommendations of the McGregor-Smith and the Hampton-

Governance Report

Corporate Governance Report

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

38

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Alexander reviews as well as the Parker review, but does not

consider it appropriate to establish targets or quotas in these

regards. The Board has considered the new FCA Listing Rule

9.8.6R (9)(a) requirements which apply to accounting periods

commencing on or after 1 April 2022 and will report in detail on

diversity targets for the year ending 31 December 2023. However,

it should be noted that the Board currently comprises four

non-executive Directors of whom 50 per cent. are female, the

Chairman is female and all Directors are classified as White British

or Other White.

On 15 February, two board changes were announced which took

effect at the end of the month. Mark Pacitti retired from the Board

and as Chairman on 28 February 2022 and Diana Dyer Bartlett

(who was previously Chairman of the Audit Committee) assumed

the role of Chairman of the Company; Lord St John of Bletso (who

was Chairman of the Management Engagement Committee)

became Chairman of the Audit Committee.

The Board conducted a recruitment process, sourcing suitable

candidates provided by independent recruitment consultants,

Fletcher Jones, along with candidates suggested by the Investment

Manager.

The Board selected and interviewed a short list of candidates to

assess their suitability and skills. Following the conclusion of this

process, the Board determined to appoint Jeremy Attard-Manche as

a non-executive director, effective from 1 March 2022.

Mr Attard-Manche brings to the Board extensive experience of

running investment businesses and has been appointed as

Chairman of the Management Engagement Committee.

Furthermore, as part of the Boards succession planning and to

broaden the experience and diversity of the Board, Denise Hadgill

was appointed as a Director of the Company with effect from 1 June

2022. Mrs Hadgill brings to the Board a wealth of investment

management and investment trust company experience.

All of the Directors will offer themselves for election or re-election

at each Annual General Meeting and explanations for why their

appointment or continued appointment is appropriate is included

in the explanatory notes to the Notice of Annual General Meeting.

Summary biographical details of the Directors are set out on

page32.

All Directors have access to the advice of the company secretary,

who is responsible for advising the Board on all governance matters.

Both the appointment and removal of the company secretary is a

matter for the whole board.

Meeting Attendance

The number of ordinary course scheduled Board and Committee

meetings held during the year to 31 December 2022, and each

Director’s attendance, is shown below:

Total number of meetings during the tenure/attendance

Management

Audit Engagement

Board Committee Committee

Number of ordinary

course meetings held 4/4 3/3 2/2

Diana Dyer Bartlett 4/4 3/3 2/2

Lord St John of Bletso 4/4 3/3 2/2

Jeremy Attard-Manche* 4/4 3/3 2/2

Denise Hadgill* 2/2 2/2 1/1

In addition, Board and Committee ad-hoc meetings were held to deal

with administrative matters and the formal approval of documents.

* Jeremy Attard- Manche and Denise Hadgill were appointed as a Non-Executive

Directors 1 March 2022 and 1 June 2022 respectively and attended all the

meetings after they were appointed.

Directors’ Tenure and Performance Appraisal

It is the Board’s policy that all Directors, including the Chairman, will

normally have their tenure limited to nine years from their first

appointment to the Board, except when the Board may determine

otherwise if it is considered that the continued participation on the

Board of an individual Director, or the Chairman, is in the best interests

of the Company and its shareholders. This is also subject to the

Director’s re-election by shareholders at each Annual General Meeting.

The Board has formulated a succession plan to promote regular

refreshment and diversity, whilst maintaining stability and continuity

of skills and knowledge on the Board.

Upon joining the Board, all Directors receive an induction and

relevant training is available to Directors on an ongoing basis.

Governance Report

Corporate Governance Report

39

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

A formal annual performance appraisal process is carried out on

the Board, the Committees, the individual Directors and the

Company’s main service providers. Led by the Chairman, the

evaluation was conducted through a programme of both open and

closed-ended questions answered by each of the Directors. The

results of the evaluation were reviewed by the Chairman and

discussed with the Board.

Based upon the conclusions of the appraisal on Directors’

performance and effectiveness, the Board recommends that Mrs

Dyer Bartlett, Lord St John of Bletso and Mr Attard-Manche should

be re-elected as Directors at the forthcoming AGM. Mrs Hadgill has

been appointed since the last AGM and accordingly stands for

election. She brings extensive investment management and

investment trust governance experience and the Board

recommends that she be elected as a Director at the forthcoming

AGM. The Board is satisfied, having considered each Director’s

experience and the nature of, and anticipated demands on their

time by their other business commitments including other

investment trusts, that each Director is able to commit the time

required to fulfil their responsibilities as a Director of the Company.

Directors’ Independence

The Board consists of four non-executive Directors, each of whom

is independent of the Investment Manager. No member of the Board

is a Director of another investment company managed by the

Investment Manager. Accordingly, the Board considers that all the

Directors are independent and there are no relationships or

circumstances which are likely to affect or could appear to affect

their judgement. The Board has additionally adopted a conflicts of

interest policy. Any new external appointments are approved by the

Chairman or the Board before they are accepted, having regard to

potential conflicts of interest and the time commitment involved.

Role of the Chair

The Chair’s main role is to lead the Board. In doing so, the Chair

promotes high standards of governance, ensures the Directors are

provided with sufficient and timely information so that they are able

to discharge their duties, allows each Board member’s views to be

considered and ensures appropriate action is taken. Additionally,

the Chair’s role includes ensuring that each Committee has the

support required to fulfil its duties, overseeing the Board’s

effectiveness reviews and the induction and development of

Directors. The Chair is required to remain independent of the

Investment Manager, whilst providing effective support, challenge

and advice to the Investment Manager. Through direct contact or

through the Company’s broker and Investment Manager, the Chair

receives the views of shareholders and also ensures that the Board

as a whole has a clear understanding of these.

Role of Committees

Audit Committee

The Board has established an Audit Committee which was chaired

during the year by Lord St John of Bletso. The Committee consists

of all the Directors. Mrs Dyer Bartlett was appointed Chairman of

the Company on 1 March 2022 and was independent on

appointment, and therefore entitled to be a member of the Audit

Committee under the AIC Code. A report of the Audit Committee is

included in this Annual Report and sets out the role and

responsibilities of the Audit Committee. The Board considers that

the members of the Audit Committee have the requisite skills and

experience to fulfil the responsibilities of the Audit Committee.

Management Engagement Committee

The Board has established a Management Engagement Committee

which was chaired during the year by Mr Attard-Manche. The

Committee consists of all the Directors. A report of the Management

Engagement Committee is included in this Annual Report and sets

out the role and responsibilities of the Management Engagement

Committee.

Nomination Committee and Remuneration Committee

The Board as a whole fulfils the function of the Nomination

Committee and the Remuneration Committee. The Board considers

its size to be such that it would be unnecessarily burdensome to

establish a separate Nomination Committee. As there are no

executive directors, there is no need for a Remuneration Committee.

The terms of reference of each committee can be found on the

Company’s website at www.smithson.co.uk.

Governance Report

Corporate Governance Report

40

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Shareholder Relations

Representatives of the Investment Manager regularly meet with

institutional shareholders and private client wealth managers to

present the Company’s financial reports and understand

shareholders’ views. Reports from the Company’s broker are

submitted to the Board on shareholder feedback and industry

issues. An analysis of the shareholder register of the Company is

also provided to the Directors at each Board meeting. Further details

of the Board’s engagement with stakeholders is given in the

Stakeholder Management report on pages 27 to 30.

The Board sees the AGM as an ideal opportunity to communicate

with private investors and the full Board will attend the AGM; the

meeting will be chaired by the Chairman. Simon Barnard, our

Investment Manager, will additionally be present. Shareholders are

also reminded that they are welcome, at any time, to submit any

questions they may have either to the Board at

smithsonchairman@fundsmith.co.uk or to the Investment Manager

at smithson@fundsmith.co.uk. At the AGM, shareholders will hear a

presentation by Simon Barnard which will also be made available

on the Company’s website at www.smithson.co.uk after the meeting.

Shareholders attending the AGM will have an opportunity to put

questions to the Board or Investment Manager at the meeting. In

addition, we would encourage shareholders to visit our website at

www.smithson.co.uk where more information is available and which

is regularly updated.

Nominee Share Code

Where shares are held in a nominee company name, the Company

undertakes:

• to provide the nominee company with multiple copies of

shareholder communications upon request; and

• to allow investors holding shares through a nominee company

to attend general meetings, provided the correct authority from

the nominee company is available.

Governance Report

Corporate Governance Report

41

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

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 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). 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 2022;

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

27 February 2023

Statement of Directors’ Responsibilities

Governance Report

42

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Statement from the Chairman

I am pleased to present the Audit Committee Report for the year

ended 31 December 2022. The Committee met three times during

this year and all members attended each meeting. The Committee

also met on 21 February 2023 to consider this report. The

Company’s external auditor attended the meetings to agree the

audit plan and to consider this Annual Report. The Investment

Manager attends meetings by invitation of the Audit Committee, but

the Audit Committee also met the external auditor without the

Investment Manager at meetings held to approve the annual

financial statements.

Composition

The Audit Committee comprises all the Directors whose biographies

are set out on page 32. Diana Dyer Bartlett was Chairman of the Audit

Committee until Lord St John of Bletso took over on 1 March 2022

when Mrs Dyer Bartlett was appointed Chairman of the Board. Both

Mr Pacitti, who was Chairman of the Company until 28 February 2022

and Mrs Dyer Bartlett who became Chairman on 1 March 2022 were

independent on appointment, and therefore entitled to be members

of the Audit Committee under the AIC Code. The Board is satisfied

that the Committee as a whole has competence relevant to the sector

in which the Company operates and the Committee considers that it

has recent and relevant financial experience. Lord St John of Bletso

has chaired a number of audit committees including that of a VCT

and Mrs Dyer Bartlett is a chartered accountant and audit committee

chairman of two other investment trusts.

Responsibilities

The Committee’s main responsibilities under its terms of reference

are:

1. To review the Company’s Interim and Annual Reports. In

particular, the Committee considers whether the financial

statements are fair, balanced and understandable, allowing

shareholders to assess the Company’s investment policy,

position and performance, business model and strategy;

2. To review the risk management and internal control processes

of the Company;

3. To recommend the re-appointment of Deloitte LLP as external

auditor and agree the scope of its work and its remuneration,

reviewing its independence and the effectiveness of the audit

process;

4. To consider any non-audit work to be carried out by the auditor.

The Audit Committee reviews the need for non-audit services

to be performed by the auditor in accordance with the

Company’s non-audit services policy, and authorise such on a

case by case basis having given consideration to the cost

effectiveness of the services and the objectivity of the auditor;

5. To consider the need for an internal audit function; and

6. To review and challenge the assumptions and qualifications in

respect of the Company’s going concern and viability

statements.

Meetings and Business

The Committee met three times during the year under review. The

following matters were dealt with at those meetings:

Financial statements

The Committee has confirmed that, in its opinion, the Board can

make the required statement that this 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. In making

this assessment, the Committee had regard to guidance published

by the Financial Reporting Council. The Committee assessed and

agreed that transactions had been fairly disclosed, performance

measures had been prepared on a consistent basis and were

reflective of the business, there was adequate commentary on the

Company’s strengths and weaknesses and that this Annual Report,

taken as a whole, is consistent with the Board’s view of the

operation of the Company. The Committee has given this

confirmation on the basis of its review of the whole document,

underpinned by involvement in the planning for its preparation and

review of the processes to assure the accuracy of factual content.

Audit Committee Report

Governance Report

43

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Significant reporting matters

The Committee considered key accounting issues, matters and

judgements in relation to the Company’s financial statements and

disclosures relating to:

Valuation and ownership of the Company’s investments

The Committee is responsible for reviewing procedures to confirm

the valuation and existence of investments. Controls are in place to

ensure that valuations are appropriate, and existence is verified

through reconciliations undertaken by the Depositary. The

Committee confirmed that the external auditor had reviewed the

valuation assumptions in accordance with the new auditing

standard with regard to material estimates.

Recognition of revenue from investments

The Committee took steps to gain an understanding of the

processes in place to record investment income and transactions.

The Committee sought confirmation that processes were in place

to ensure that all dividend income and recovery of overseas tax is

captured correctly reflected in the Company’s Financial Statements.

Accounting policies

The current accounting policies, as set out on pages 62 to 65, have

been applied consistently throughout the period.

Going concern and viability statements

Having reviewed the Company’s financial position, liabilities,

principal risks and prospects, the Committee recommended to the

Board that it was appropriate for the Board to prepare the financial

statements on the going concern basis. Further detail is provided

on page 34. It further formulated the Viability Statement set out on

page 26 including the appropriate assessment period.

Risk management and internal controls

The Board has overall responsibility for the Company’s risk

management and systems of internal controls and for reviewing

their effectiveness. In common with the majority of investment

trusts, investment management, accounting, company secretarial

and custodial services have been delegated to third parties.

The Board has delegated responsibility to the Audit Committee to

advise on the assessment and management of principal risks as

well as identification of emerging risks. The principal risks, risk

mitigation and procedures to identify emerging risks are

summarised in the Strategic Report. The Committee reviewed the

Company’s schedule of key risks twice during the period and

reviewed a risk appetite statement summarising the Board’s attitude

to its principal risks and to identify when active Board engagement

might be required outside the normal cycle of Board meetings.

Nosignificant control failings or weaknesses were identified in the

Committee’s most recent risk review and no modifications to the

risk mitigation programme were recommended.

A review of the Company’s anti-bribery and corruption policy and its

policy for the prevention of the facilitation of tax evasion was carried

out and it was determined they continued to be appropriate and

reflective of best practice. It also confirmed that appropriate

whistleblowing policies were in place at the Investment Manager and

the other key service providers. The Board has adopted best practice

of the AIC Code and responsibility for overseeing whistleblowing

procedures has been elevated to the Board level as well.

Internal audit

The Audit Committee has considered the need for an internal audit

function and considers that this is not appropriate given the nature

and circumstances of the Company. Separately, the Audit

Committee considered whether there was merit in appointing a firm

of accountants to undertake any internal audit reviews into the

Company’s policies and procedures. It concluded that this would

not add any value on the basis that all the Company’s operations

had been outsourced to third parties and reports were received from

key third parties regarding their processes and procedures. In

relation to the Investment Manager, fund administrator and

depositary, external audit reports were also received which

confirmed that no issues had been identified with such third parties’

procedures and internal controls. The Audit Committee keeps the

need for an internal function under periodic review.

External Auditor

During the year, the nature and scope of the external audit together

with Deloitte LLP’s audit plan were considered by the Committee.

Subsequent to the year end, the Committee also met with Deloitte LLP

to review the outcome of the audit and the draft 2022 Annual Report.

In order to fulfil the Committee’s responsibility regarding the

independence of the auditor, the Committee considered:

• the senior audit personnel;

• the auditor’s arrangements concerning any potential conflicts

of interest;

Governance Report

Audit Committee Report

44

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

• the extent of any non-audit services undertaken by the auditor

on behalf of the Company; and

• the statement by the auditor that they remain independent within

the meaning of the regulations and their professional standards.

In its review of the effectiveness of the audit process, the Committee

considered:

• the auditor’s fulfilment of the agreed audit plan;

• the level and effectiveness of challenge provided by the auditor;

• the audit quality control arrangements, including the stages of

review of the Annual Report, the time spent by the audit partner

and whether any issues identified during the audit had been

dealt with on a timely basis;

• the auditor’s report on the FRC’s Audit Quality Review issued

in July 2022 (and confirmation that there were no significant

developments since that time);

• the auditor’s audit approach taking into account the

requirements in respect of material assumptions;

• the report arising from the audit itself; and

• feedback from the company secretary, the Investment Manager

and the fund administrator on the conduct of the audit.

The Committee was satisfied with the auditor’s independence and

the effectiveness of the audit process, together with the degree of

diligence and professional scepticism brought to bear and that the

auditor provided effective independent challenge in carrying out its

responsibilities.

The Committee confirms that the Company is in compliance with

the requirements of the Statutory Audit Services for Large

Companies Market Investigation (Mandatory Use of Competitive

Tender Processes and Audit Committee Responsibilities) Order

2014. This order relates to the frequency and governance of tenders

for the appointment of the external auditor and the setting of the

policy on the provision of non-audit services.

Non-audit services

The Company’s policy for the provision of non-audit services by the

auditor is aligned with the Revised Ethical Standards 2019 (the

“Auditing Standards”). The Company’s policy is that the provision of

non-audit services by the auditor is permissible where no conflicts

of interest arise, where the independence of the auditor is not likely

to be impinged by undertaking the work and the quality and the

objectivity of both the non-audit work and audit work will not be

compromised. There were no non-audit services undertaken by the

Company’s auditor during the year under review.

Details of the fees paid to the external auditor for audit services are

set out in note 5 to the financial statements. The Audit Committee

received representations from the external auditor concerning their

independence and considered the external auditor to be independent.

Auditor re-appointment

The auditor to the Company is Deloitte LLP who were engaged on

24 July 2019. The audit partner, Chris Hunter, has held the role

since that date.

The Committee conducted a review of the performance of the

auditor during the year and concluded that performance was

satisfactory and that there were no grounds for change. It also

reviewed the audit fee.

Deloitte LLP have indicated their willingness to continue to act as

auditor to the Company for the forthcoming year and a resolution for

their re-appointment will be proposed at the Annual General Meeting

as well as a resolution to approve the auditor’s remuneration.

Audit Committee Effectiveness

During the year the Audit Committee reviewed its effectiveness and

concluded that it had discharged all its obligations as set out in the

Audit Committee’s terms of reference in an efficient and effective

manner. The Audit Committee concluded that there were no

changes required to its procedures.

Lord St John of Bletso

Chairman of the Audit Committee

27 February 2023

Audit Committee Report

Governance Report

45

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Statement from the Chairman

I am pleased to present the Management Engagement Committee

Report for the year ended 31 December 2022. Lord St John of

Bletso chaired the Management Engagement until my appointment

on 1 March 2022.

The Management Engagement Committee met twice during the year

and the attendance by each Director is shown in the table on

page38. The Committee also met on 21 February 2023 to consider

this Report.

Composition

The Committee comprises all the Directors whose biographies are

set out on page 32.

Responsibilities

The Committee’s main responsibilities during the period were:

• to undertake an annual review of the compliance by the

Investment Manager with the Company’s investment policy as

established by the Board and with the Investment Management

Agreement entered into between the Company and the AIFM

and the Investment Manager; and

• to undertake an annual review of the performance of the

Investment Manager and any other key service providers to the

Company other than the external auditor.

Investment Manager

The Company has appointed Fundsmith LLP as the Company’s AIFM

and Investment Manager.

Before the publication of this report, the Management Engagement

Committee reviewed the performance of the Investment Manager

and whether it had fulfilled the terms of the Investment

Management Agreement and complied with the Company’s

investment policy. It also received a report and presentation from

the Investment Manager’s Compliance Officer regarding the

Investment Manager’s compliance processes.

The Committee agreed that the Investment Manager has the

required skills and depth of experience to manage the Company’s

investments. The Committee also concluded that the performance

of the Investment Manager was satisfactory, and that the continuing

appointment of the Investment Manager was in the best interests

of shareholders. The Committee agreed that the existing fee

arrangements and other contractual terms remained appropriate

and further aligned the Investment Manager’s interests with those

of the Company’s shareholders.

Other Key Service Providers

The Company’s other key service providers are:

• Depositary and administrator (Northern Trust Investor Services

Limited)

• Custodian (Northern Trust Company)

• Company secretary (Apex Listed Companies Services (UK)

Limited (formerly Sanne Fund Services (UK) Limited))

• Registrar (Link Group) and

• Broker (Investec Bank plc)

The Committee received feedback on the performance of these

service providers by the Investment Manager and company

secretary and the level of fees is monitored. The fee rates charged

by the depositary and administrator were reduced from the start

of2022.

The Committee also asked all its key service providers to complete

questionnaires concerning their operations, internal controls,

business continuity plans, policies and procedures and these

questionnaires were reviewed by the Committee.

Following the Committee’s review and analysis, the Committee

concluded that the performance of all the Company’s current key

service providers was satisfactory and that each be retained until

the next review.

Governance Report

Management Engagement Committee Report

46

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Management Engagement Committee

Effectiveness

During the year the Management Engagement Committee reviewed

its effectiveness and concluded that it had discharged all its

obligations as set out in the Management Engagement Committee’s

terms of reference in an efficient and effective manner.

The Management Engagement Committee concluded that there

were no changes required to its procedures.

Jeremy Attard-Manche

Chairman of the Management Engagement Committee

27 February 2023

Management Engagement Committee Report

Governance Report

47

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Statement from the Chairman

I am pleased to present the Directors’ Remuneration Report to

shareholders. The law requires the Company’s auditor to audit

certain disclosures provided in this report. Where disclosures have

been audited, they are indicated as such and the auditor’s opinion

is included in its report to shareholders within this Annual Report.

All Directors are non-executive and do not have service contracts

with the Company but are engaged under letters of appointment.

The Directors’ letters of appointment, and the terms and conditions

within, are available for inspection on request at the Company’s

registered office.

The Board considers the framework for the remuneration of the

Directors on an annual basis. It reviews the ongoing appropriateness

of the Company’s Remuneration Policy and the individual

remuneration of Directors by reference to the activities of the

Company and comparison with other companies of a similar

structure and size.

During the year, Directors’ remuneration was set at £30,000 for

Board members, with an additional fee payable per annum of

£15,000 to the Chair of the Board; £10,000 to the Chair of the Audit

Committee; and £5,000 to the Chair of the Management

Engagement Committee.

The Board undertook an evaluation of its remuneration taking into

consideration the latest inflation rates and peer group comparisons

by sector and market capitalisation. The Board notes that the

Directors’ remuneration was below the median remuneration of the

Company’s peer group and that an increase would be appropriate.

However, in recognition of the Company’s performance over the year

to 31 December 2022 and shareholders returns, the Board resolved

not to increase the Directors’ remuneration.

The total fees paid to the Directors for the year to 31 December

2022 are set out in the table below.

Directors’ Remuneration Policy

Set out below is the Directors’ Remuneration Policy which will be

put to shareholders for approval at the 2023 AGM. This Policy is

unchanged from that approved by shareholders at the 2020 AGM.

The Company’s Remuneration Policy provides that fees payable to

the Directors should reflect the value of the time spent by the Board

on the Company’s affairs and the responsibilities borne by the

Directors and should be sufficient to enable candidates of high

calibre to be recruited. Directors are remunerated in the form of fees

payable monthly in arrears, paid to the Director personally. There

are no long-term incentive schemes, share option schemes or

pension arrangements and the fees are not specifically related to

the Directors’ performance, either individually or collectively.

Directors’ remuneration comprises solely Directors’ fees.

Additionally, there are no benefits in kind, however, Directors are

authorised to claim reasonable expenses from the Company in

relation to the performance of their duties such as expenses

incurred in the course of travel to attend meetings and duties

undertaken. Directors may also earn a pro rata day rate in

connection with extraordinary corporate events or transactions

requiring them to commit significant extra time to the Company.

No additional day rates were charged in 2022 (2021: nil).

TheCompany does not have any employees.

Whilst the articles allow the Company to establish pension schemes

and similar benefits for the Directors, no such scheme has been

established and there are no plans to establish one.

In accordance with statute, the Remuneration Policy will be

considered by shareholders at the Annual General Meeting at least

once every three years. The Remuneration Policy was approved by

shareholders at the AGM held on 30 March 2020. Accordingly, an

ordinary resolution for the approval of the Remuneration Policy will

be considered by shareholders at the forthcoming Annual General

Meeting. The provisions set out in the Remuneration Policy apply

until they are next submitted for shareholder approval. In the event

of any proposed material variation to the Remuneration Policy,

shareholder approval will be sought for the proposed new policy

prior to its implementation. The Remuneration Policy sets out the

principles the Company follows in remunerating Directors and the

result of the shareholder vote on the Remuneration Policy is binding

on the Company.

Governance Report

Directors’ Remuneration Report

48

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Current and Future Policy

Purpose of

Component Director reward Operation

Annual All Directors For services as Determined

director’s non-executive by the

fee Directors Board

of a plc

Additional Chair of the For additional Determined

fee Board and responsibility by the

Chair of each and time Board

committee commitment

Expenses All Directors Reimbursement Submission

of expenses of appropriate

incurred in the supporting

performance of documentation

duties

Directors’ Remuneration Policy Implementation

Report

The way in which the Board implemented the Company’s

Remuneration Policy in the year ended 31 December 2022 is set

out below.

(Audited) (Audited)

Fee for the Fee for the

year to year to

31 December 31 December

2022 (£) 2021 (£)

Diana Dyer Bartlett 44,167 40,000

Lord St John of Bletso 39,167 35,000

Jeremy Attard-Manche* 29,167 –

Denise Hadgill* 17,500 –

Mark Pacitti* 7,500 45,000

Total 137,501 120,000

* Mr Pacitti retired 28 February 2022. Jeremy Attard- Manche and Denise Hadgill

were appointed as a Non-Executive Directors 1 March 2022 and 1 June 2022

respectively.

Annual Percentage Change in Directors’

Remuneration (unaudited)

In accordance with The Companies (Directors’ Remuneration Policy

and Directors’ Remuneration Report) Regulations 2019, the table

below sets out the annual percentage change in Directors’ fees in

respect of each Director.

Year ended Year ended Year ended

31 December 31 December 31 December

2022 % 2021 % 2020 %

Diana Dyer Bartlett – 48.1 –

Lord St John of Bletso – 29.6 –

Jeremy Attard-Manche* – – –

Denise Hadgill* – – –

Mark Pacitti* – 50.0 –

* Mr Pacitti retired 28 February 2022. Jeremy Attard- Manche and Denise Hadgill

were appointed as a Non-Executive Directors 1 March 2022 and 1 June 2022

respectively.

No communications have been received from shareholders

regarding Directors’ remuneration. The remuneration for the

non-executive Directors is within the limits set out in the Company’s

Articles of Association. The present limit is £250,000 in aggregate

per annum.

Directors’ Fees and Expenses

The Directors, as at the date of this report, received the fees listed

above. These exclude any employers’ national insurance

contributions. No other forms of remuneration were received by the

Directors and so fees represent the total remuneration of each

Director.

Sums Paid to Third Parties (audited information)

None of the fees referred to in the above table were paid to any third

party in respect of the services provided by any of the Directors.

Governance Report

Directors’ Remuneration Report

49

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Loss of Office

The Directors’ letters of appointment specifically exclude any

entitlement to compensation upon leaving office for whatever

reason. Appointment as Director may, at the discretion of either

party, be terminated upon three months’ notice.

Share Price Total Return

A performance comparison is required to be presented in this report.

The performance comparison is shown for the period since launch

to 31 December 2022. The MSCI World SMID Cap Index, on a net

sterling adjusted basis, has been adopted by the Board as reference

index against which the Company’s performance has been

measured for the period.

Relative Cost of Directors’ Remuneration

The bar chart below shows the comparative cost of Directors’ fees

compared with Company expenses for the year ended 31 December

2022 and comparative for the year to 31 December 2021. During

the year no dividends were paid (2021: same) and the Company

repurchased 5.7 million ordinary shares at a cost of £74.0 million

(2021: nil).

Directors’ Interests in the Company’s Shares as at

31 December 2022 (audited)

The beneficial interests of the Directors of the Company (and their

connected parties) at the year end and at the date of this report are

set out below:

No of ordinary shares

31 December 31 December

Director 2022 2021

Diana Dyer Bartlett 8,886 5,000

Lord St John of Bletso 10,000 10,000

Jeremy Attard-Manche – –

Denise Hadgill 1,111 –

Mark Pacitti* – 20,000

No changes have been notified at the date of this report.

Mr Attard-Manche and Mrs Hadgill were appointed as a

non-executive Directors 1 March 2022 and 1 June 2022 respectively.

Mr Pacitti retired as a non-executive Director on 28 February 2022.

MSCI World SMIDShare Price

%

-25

0

25

50

75

100

Launch

Nov-18

Jan-19

Feb-19

Feb-22

Apr-19

May-19

Jun-19

Aug-19

Sep-19

Oct-19

Dec-19

Jun-22

Aug-22

Sep-22

Oct-22

Dec-22

Jan-20

Mar-20

Apr-20

May-20

May-22

Jul-20

Aug-20

Sep-20

Nov-20

Dec-20

Jan-22

Feb-21

Mar-21

Mar-22

Apr-21

Jun-21

Jul-21

Sep-21

Oct-21

Nov-21

£’000

0

10000

20000

30000

40000

50000

60000

70000

80000

2022

2021

Directors Fees

Company

Expenses

Dividends

Share buybacks

120138

23,461

27,467

00

73,983

0

Governance Report

Directors’ Remuneration Report

50

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Shareholder Approval

An ordinary resolution for the approval of the Directors’

Remuneration Report will be put to shareholders annually at the

Company’s Annual General Meeting. This vote is advisory only and

not binding on the Company, nor does it affect the remuneration

payable to any individual Director. However, it does give

shareholders the opportunity to inform the Board of their views on

Directors’ remuneration. As set out on page 47, an ordinary

resolution for the approval of the Directors Remuneration Policy will

be put to shareholders at the Company's Annual General Meeting

on 27 April 2023. The Directors Remuneration Policy sets out the

Company’s proposed forward-looking policy on Directors

remuneration. The vote is binding and the Company is obliged to

present a policy on Directors remuneration to shareholders for

approval at least every three years.

The following table sets out the votes received at the last Annual

General Meeting of shareholders, held on 3 May 2022, in respect

of the approval of the Directors’ Remuneration Report.

In Favour/

Discretionary Against Withheld

Total Total Total

Votes % Votes % Votes

Directors’

Remuneration

Report 48,422,869 98.92 530,511 1.08 64,411

Statement

On behalf of the Board and in accordance with Part 2 of Schedule 8

of the Large and Medium-sized Companies and Groups (Accounts

and Reports) (Amendment) Regulations 2013, I confirm that this

report summarises, as applicable, for the year to 31 December 2022:

(i) the major decisions on Directors’ remuneration;

(ii) any substantial changes relating to Directors’ remuneration

made during the period; and

(iii) the context in which the changes occurred and decisions have

been taken.

This report on Directors’ remuneration was approved by the Board

on 21 February 2023 and signed on its behalf by the Chairman.

Diana Dyer Bartlett

Chairman

27 February 2023

Governance Report

Directors’ Remuneration Report

51

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

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’):

l give a true and fair view of the state of the company’s affairs as at 31 December 2022 and of its loss for the year then ended;

l 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

l have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements which comprise:

l the statement of comprehensive income;

l the statement of financial position;

l the statement of changes in equity;

l the statement of cash flows; and

l 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:

l Valuation and ownership of investments

Within this report, key audit matters are identified as follows:

Newly identiﬁed

Increased level of risk

Similar level of risk

Decreased level of risk

Materiality The materiality that we used in the current year was £24.2m which was determined on the

basis of 1% of net assets as at 31 December 2022.

Scoping Audit work to respond to the risks of material misstatement are performed directly by the

audit engagement team.

Significant changes in our approach There were no significant changes in our approach in the current year.

#

52

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Independent Auditor’s Report

Financial Statements

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:

l Assessing the controls in place to evaluate the ability of the company to continue to operate as an Investment Trust;

l Challenging the underlying data and key assumptions used to make the assessment, and evaluating their plans for future actions in

relation to their going concern assessment;

l Assessing the projected period of time to liquidate the portfolio and expense cover for the subsequent 12 month period from the date

of signing the financial statements (from February 2023) for reasonableness;

l Assessing any other market altering factors such as inflation, high energy costs and rising interest rates by looking at the operational

impact and business continuity plans; and

l Assessing the appropriateness of the going concern 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 £2,394m as at 31 December

2022 (2021: £3,339m) which have decreased by 28% from the prior year. 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.

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 on page 43.

53

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Financial Statements

Independent Auditor’s Report

How the scope of our audit responded We performed the following procedures to address the valuation and ownership of

to the key audit matter investment key audit matter:

l We obtained an understanding and tested relevant controls over valuation and ownership

of investments.

l We independently valued 100% of the investment portfolio to the closing bid prices

published by an independent pricing source.

l We confirmed the ownership of 100% of investments at the year-end date by obtaining

independent third-party confirmations directly from the depositary.

In addition, we performed the following procedures to address whether the investment

portfolio was actively traded and designated with the correct fair value hierarchy:

l We assessed the post year-end volume of trade date in order to identify investments that

are not actively traded.

l We tested the completeness and accuracy of disclosures in relation to fair value

measurements and liquidity risk.

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 £24.2m (2021: £33.6m)

Basis for determining materiality 1% (2021: 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 decrease in materiality year on year

arose principally from the decrease in the company’s net assets.

54

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Independent Auditor’s Report

Financial Statements

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 2022 audit (2021: 65%). 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. no significant changes in the company’s operating environment caused by the uncertainty and volatility brought about by the inflation,

high energy costs and rising 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 £1.2m (2021: £0.67m), 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

We assessed the control environment including the use of service organisations. We tested relevant controls in respect to the valuation

and ownership of investments and adopted a control reliance strategy. We performed an understanding of relevant business process

and relevant 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 page 31. As a part of our audit, we held discussions to understand the process of identifying

climate-related risks, the 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.

Net Assets

£2,417m

Net Assets

Materiality

Materiality £24.2m

Audit Committee

Reporting threshold

£1.20m

55

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Independent Auditor’s Report

Financial Statements

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:

l 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;

l results of our enquiries of management and the audit committee about their own identification and assessment of the risks of

irregularities;

l any matters we identified having obtained and reviewed the company’s documentation of their policies and procedures relating to:

m identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;

m detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;

m the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;

l the matters discussed among the audit engagement team regarding how and where fraud might occur in the financial statements

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.

56

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

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 and tax legislation.

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.

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 the key audit matter.

In addition to the above, our procedures to respond to risks identified included the following:

l 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;

l enquiring of management and the audit committee concerning actual and potential litigation and claims;

l performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement

due to fraud;

l reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with

HMRC and the FCA; and

l 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:

l 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

l 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:

l the directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material

uncertainties identified set out on pages 33 to 36;

l 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 on page 26;

l the directors' statement on fair, balanced and understandable set out on page 41;

l the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 23;

Financial Statements

Independent Auditor’s Report

57

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

l the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out

on page 43; and

l the section describing the work of the audit committee set out on pages 42 to 44.

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:

l we have not received all the information and explanations we require for our audit; or

l adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited

by us; or

l 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 matters.

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 4 years, covering the years ending 31 December 2019 to 31 December 2022.

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

27 February 2023

Independent Auditor’s Report

Financial Statements

58

Statement of Comprehensive Income

For the year ended 31 December 2022 For the year ended 31 December 2021

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 31,341 – 31,341 21,638 – 21,638

(Losses)/gains on investments

held at fair value through proﬁt or loss 9 – (970,879) (970,879) – 513,312 513,312

Foreign exchange gains/(losses) 147 (399) (252) (25) (565) (590)

Investment management fees 4 (21,998) – (21,998) (25,884) – (25,884)

Other expenses and transaction costs 5 (1,463) (743) (2,206) (1,583) (639) (2,222)

(Loss)/proﬁt before tax 8,027 (972,021) (963,994) (5,854) 512,108 506,254

Tax 6 (3,670) – (3,670) (2,540) – (2,540)

(Loss)/proﬁt for the year 4,357 (972,021) (967,664) (8,394) 512,108 503,714

(Loss)/return per share

(basic and diluted) (p) 7 2.49 (555.60) (553.11) (5.27) 321.50 316.23

The Company does not have any income or expenses which are not included in the (loss)/return for the year.

All of the (loss)/return 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.

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

59

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Statement of Financial Position

As at As at

31 December 2022 31 December 2021

Notes £’000 £’000

Non-current assets

Investments held at fair value through proﬁt or loss 9 2,393,848 3,339,150

Current assets

Receivables 10 3,853 1,203

Cash and cash equivalents 24,589 32,081

28,442 33,284

Total assets 2,422,290 3,372,434

Current liabilities

Trade and other payables 11 (4,323) (5,364)

Total assets less current liabilities 2,417,967 3,367,070

Equity attributable to equity shareholders

Share capital 12 1,771 1,717

Share premium 13 2,219,487 2,126,997

Capital reserve 203,358 1,249,362

Revenue reserve (6,649) (11,006)

Total equity 2,417,967 3,367,070

Net asset value per share (p) 14 1,410.7 1,961.0

The financial statements were approved by the Board on 27 February 2023 and were signed on its behalf by:

Lord St John of Bletso

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)

Financial Statements

60

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Statement of Changes in Equity

Financial Statements

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

For the year ended 31 December 2021

Share Share Capital* Revenue*

Capital Premium Reserve Reserve Total

Notes £’000 £’000 £’000 £’000 £’000

Balance at 1 January 2021 1,414 1,595,894 737,254 (2,612) 2,331,950

Issue of new shares 303 533,918 – – 534,221

Costs on new share issues – (2,815) – – (2,815)

Proﬁt/(loss) for the year – – 512,108 (8,394) 503,714

Balance at 31 December 2021 12 1,717 2,126,997 1,249,362 (11,006) 3,367,070

* Distributable reserve.

The accompanying notes are an integral part of these financial statements.

61

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Statement of Cash Flows

For the year to For the year to

31 December 2022 31 December 2021

Notes £’000 £’000

Operating activities

(Loss)/proﬁt before tax (963,994) 506,254

Adjustments for:

Loss/(gain) on investments held at

fair value through proﬁt or loss 9 970,879 (513,312)

Decrease in receivables 25 592

(Decrease)/increase in payables (1,175) 751

Overseas taxation paid 6 (4,584) (2,705)

Net cash used in operating activities 1,151 (8,420)

Investing activities

Purchases of investments 9,11 (651,473) (673,005)

Sale of investments 9 624,269 127,272

Net cash used in investing activities (27,204) (545,733)

Financing activities

Proceeds from issue of new shares 12 93,104 539,023

Issue costs relating to new shares 12 (560) (2,835)

Purchase of shares held in treasury 12 (73,604) –

Costs relating to buy backs 12 (379) –

Net cash generated from ﬁnancing activities 18,561 536,188

Net decrease in cash and cash equivalents (7,492) (17,965)

Cash and cash equivalents at start of the year 32,081 50,046

Cash and cash equivalents at end of the year 15 24,589 32,081

Comprised of:

Cash at bank 24,589 32,081

Dividends and interest received in cash during the year amounted to £31,348,000 and £56,000 (2021: £22,197,000 and £nil),

respectively.

The accompanying notes are an integral part of these financial statements.

Financial Statements

62

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.

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

63

1. Accounting policies (continued)

(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 in the period in which they are paid. 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.

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

64

1. Accounting policies (continued)

(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 arose 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.

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

65

1. Accounting policies (continued)

(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.

• IFRS 17, ‘Insurance contracts’ (effective for accounting periods beginning on or after 1 January 2023).

• Amendments to IAS1 ‘Classification of liabilities as current or non-current’ (effective for accounting periods beginning on or

after 1 January 2023).

• Amendments to IAS 8 'Definition of Accounting Estimates' (effective for accounting periods on or after 1 January 2023).

• Amendments to IAS 1 and IFRS Practice Statement 2 'Disclosure of Accounting Policies' (effective for accounting periods on

or after 1 January 2023).

• Amendments to IAS 12 'Deferred Tax related to Assets and Liabilities arising from a Single Transaction' (effective for accounting

periods on or after 1 January 2023).

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.

There were no new standards or interpretations effective for the first time for periods beginning on or after 1 January 2022.

2. Dividend income

2022 2021

£’000 £’000

UK dividends 6,603 7,119

UK dividends - special 3,324 –

Overseas dividends 16,921 14,232

Overseas dividends - special 4,437 287

Bank interest 56 –

Total 31,341 21,638

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.

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

66

4. Investment management fee

2022 2021

£’000 £’000

Investment management fee 21,998 25,884

As at 31 December 2022, an amount of £1,659,000 (2021: £2,576,000) was payable to the Investment Manager. Details of the terms

of the Investment Management Agreement are provided on page 33.

5. Other expenses

2022 2021

Revenue Capital Total Revenue Capital Total

£’000 £’000 £’000 £’000 £’000 £’000

Transaction costs on investments held at fair value

through proﬁt or loss – 743 743 – 639 639

Directors’ fees 135 – 135 120 – 120

Employer national insurance contributions – – – 5 – 5

Auditor fees in relation to audit

#

47 – 47 36 – 36

Tax compliance fee (11) – (11) 20 – 20

Registrar fees 44 – 44 40 – 40

Broker fees 40 – 40 40 – 40

Company secretarial fees 93 – 93 117 – 117

Custody fees 190 – 190 338 – 338

Depositary fees 244 – 244 233 – 233

Postage and printing 30 – 30 28 – 28

Legal fees (23) – (23) 25 – 25

Fund administration fees 360 – 360 344 – 344

Other expenses* 314 – 314 237 – 237

Total Expenses 1,463 743 2,206 1,583 639 2,222

# The Auditor fee for the 2022 audit is £45,000.

* Other expenses include a net charge for unrecoverable VAT of £79,000 (2021: £56,000 net charge), which includes £92,000 recovered in relation to 2022,

(2021:£181,000 recovered in relation to 2021).

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 £538,000 (2021: £593,000) and on sales amounted to £205,000

(2021: £46,000).

No non-audit fees were paid during the year to Deloitte LLP by the Company (2021: nil).

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

67

6. Taxation

(a) Analysis of tax charge in the year

2022 2021

Revenue Capital Total Revenue Capital Total

£’000 £’000 £’000 £’000 £’000 £’000

Taxation on ordinary activities

Irrecoverable overseas withholding tax 3,670 – 3,670 2,540 – 2,540

Total tax 3,670 – 3,670 2,540 – 2,540

(b) The tax charge for the year is lower than the standard rate of corporation tax in the UK of 19%. The differences are explained

below:

2022 2021

Revenue Capital Total Revenue Capital Total

£’000 £’000 £’000 £’000 £’000 £’000

Proﬁt/(loss) before tax 8,027 (972,021) (963,994) (5,854) 512,108 506,254

Corporation tax at standard rate of 19% 1,525 (184,684) (183,159) (1,112) 97,301 96,189

Effects of non taxable items:

UK dividends (1,886) – (1,886) (1,353) – (1,353)

Overseas dividends (4,058) – (4,058) (2,759) – (2,759)

Interest income (11) – (11) – – –

Net losses/(gains) on investments held at

fair value through proﬁt or loss – 184,467 184,467 – (97,529) (97,529)

Expenses and foreign exchange (gains)/losses (28) 217 189 5 228 233

Deferred tax asset not recognised 4,458 – 4,458 5,219 – 5,219

Total corporation tax – – – – – –

Irrecoverable overseas withholding tax 3,670 – 3,670 2,540 – 2,540

Total tax 3,670 – 3,670 2,540 – 2,540

As at 31 December 2022, the Company had unrecognised tax losses of £82.4 million (2021: £58.9 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.

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

68

7. Return per share

Return per ordinary share is as follows:

2022 2021

Revenue Capital Total Revenue Capital Total

Proﬁt/(loss) for the year (£’000) 4,357 (972,021) (967,664) (8,394) 512,108 503,714

Return/(loss) per ordinary share (p) 2.49 (555.60) (553.11) (5.27) 321.50 316.23

Return per share is calculated based on returns for the year and the weighted average number of 174,950,862 ordinary shares in issue

from 1 January 2022 to 31 December 2022. (2021: 159,284,761)

8. Dividends

There are no dividends proposed, declared or payable for the year (2021: nil).

9. Investments held at fair value through profit or loss

All investments are designated as fair value through profit or loss on initial recognition, therefore all gains and losses arise on investments

designated as fair value through profit or loss.

2022 2021

As at 31 December £’000 £’000

Opening book cost 2,162,638 1,581,420

Opening investment holding gains 1,176,512 698,518

Opening fair value at 1 January 3,339,150 2,279,938

Purchases at cost 651,607 673,172

Sales – proceeds (626,030) (127,272)

(Loss)/gain on investments (970,879) 513,312

Closing fair value at 31 December 2,393,848 3,339,150

Closing book cost at 31 December 2,353,438 2,162,638

Closing unrealised gain at 31 December 40,410 1,176,512

Valuation at 31 December 2,393,848 3,339,150

The Company received £626,030,000 (2021: £127,272,000) excluding transaction costs from investments sold in the year. The book

cost of the investments when they were purchased was £461,550,000 (2021: £92,593,000) 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.

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

69

9. Investments held at fair value through profit or loss (continued)

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

2022

Level 1 Level 2 Level 3 Total

As at 31 December £’000 £’000 £’000 £’000

Investments held at fair value through proﬁt or loss 2,393,848 – – 2,393,848

Total 2,393,848 – – 2,393,848

2021

Level 1 Level 2 Level 3 Total

£’000 £’000 £’000 £’000

Investments held at fair value through proﬁt or loss 3,339,150 – – 3,339,150

Total 3,339,150 – – 3,339,150

10. Receivables

2022 2021

As at 31 December £’000 £’000

Accrued income 182 247

Overseas tax recoverable 1,810 896

Securities sold receivable 1,761 –

Other receivables 100 60

3,853 1,203

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.

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

70

11. Payables

2022 2021

As at 31 December £’000 £’000

Securities purchased payable 2,399 2,265

Investment management fee payable 1,659 2,576

Other payables 265 523

4,323 5,364

12. Share capital

2022 2021

Ordinary Treasury Total Nominal Total Nominal

Shares Shares Shares Value Shares Value

As at 31 December Number Number Number £’000 Number £’000

Issued, allotted and fully paid (ordinary)

Ordinary shares in issue at 1 January 171,697,958 – 171,697,958 1,717 141,420,958 1,414

Ordinary shares issued 5,410,000 – 5,410,000 54 30,277,000 303

Ordinary shares bought back and

held in treasury (5,700,000) 5,700,000 – – – –

171,407,958 5,700,000 177,107,958 1,771 171,697,958 1,717

During the year ended 31 December 2022, the Company issued 5,410,000 (2021: 30,277,000) shares of £0.01 each for a net

consideration of £92,544,000 (2021: £531,406,000).

During the year ended 31 December 2022, the Company bought back to hold in treasury 5,700,000 shares (31 December 2021: nil) at

an aggregate cost of £73,983,000 (31 December 2021: nil). At the year end, the Company held 5,700,000 (31 December 2021: nil)

shares in treasury.

Details of the shareholder authorities granted to Directors to issue and buy back shares during the year are provided on pages 35 to 36.

13. Share premium account

2022 2021

As at 31 December £’000 £’000

Balance at 1 January 2,126,997 1,595,894

Issue of new shares on secondary market 93,050 533,918

Costs on new share issues on secondary market (560) (2,815)

2,219,487 2,126,997

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

71

14. Net asset value per share

As at 31 December 2022 2021

Net asset value £2,417,967,000 £3,367,070,000

Shares in issue 171,407,958 171,697,958

Net asset value per ordinary share 1,410.7 1,961.0p

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.

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

72

15. Risk management and financial instruments (continued)

At the reporting date, the Company’s financial assets exposed to credit risk amounted to the following:

2022 2021

As at 31 December £’000 £’000

Cash and cash equivalents 24,589 32,081

Receivables 3,853 1,203

28,442 33,284

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 2022 31 December 2021

Investments Cash Receivables Payables Total Investments Cash Receivables Payables Total

£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 – £’000

Australian Dollar 157,673 – 1,761 (1,761) 157,673 219,406 – – – 219,406

Danish Krone 202,662 507 323 (2,399) 201,093 172,599 – 144 – 172,743

Euro 387,099 – 346 – 387,445 342,925 – 167 – 343,092

New Zealand

Dollar 68,459 – – – 68,459 72,356 – 2,265 (2,265) 72,356

Swedish Krona 51,686 – 156 – 51,842 – – – – –

Swiss Franc 149,073 – 985 – 150,058 218,311 – 586 – 218,897

US Dollar 958,501 110 – – 958,611 1,603,229 137 – – 1,603,366

1,975,153 617 3,571 (4,160) 1,975,181 2,628,826 137 3,162 (2,265) 2,629,860

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 2022, an exchange rate move of +/-5% (2021: +/-5%) against sterling which is a reasonable approximation of possible

changes would have increased or decreased total net assets and total return by £98,759,000 (2021: £131,493,000).

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

73

15. Risk management and financial instruments (continued)

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 £24,589,000 (2021: £32,081,000) 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 2022 the interest

rate was 1.4% (2021: 0%).

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 £123,000 (2021: £160,000). 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% (2021: 20%) at 31 December 2022, the impact on profit or loss and net assets would have

been negative £478,769,600 (2021: £667,830,000). An increase of 20% (2021: 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.

2022 2021

As at 31 December £’000 £’000

Assets at fair value through proﬁt or loss 2,393,848 3,339,150

Cash and cash equivalents 24,589 32,081

Investment income receivable 182 247

Securities sold receivable 1,761 –

Other receivables 100 60

Payables (4,323) (5,364)

2,416,157 3,366,174

Non-ﬁnancial assets held at fair value

Overseas tax recoverable 1,810 896

Net assets 2,417,967 3,367,070

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 2022 held £24,589,000 (2021: £32,081,000) in cash.

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

74

15. Risk management and financial instruments (continued)

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

£2,417,967,000 (2021: £3,367,070,000).

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 2022 there were no contingent liabilities or capital commitments (2021: 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 £137,500 (2021: £120,000), 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 2,919,112 (2021: 3,073,866) shares in the Company amounting to 1.7% (2021: 1.7%) of the issued share capital of the Company

as at 31 December 2022.

18. Events after the reporting period

Since the year end and up to 22 February 2023 (the latest practical date before publication of the Annual Report), the Company has

boughtback to hold in treasury 1,050,000 ordinary shares at an aggregate cost of £15.0 million.

On 6 February 2023, shareholder approval was obtained to apply to the High Court to reduce the Company's share premium by £500 million.

The capital reduction, if approved by the High Court, will result in a corresponding increase in the Company's distributable reserves.

Notes to the Financial Statements

Financial Statements

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

75

Financial Calendar

31 December Financial Year End

February Final Results Announced

April Annual General Meeting

30 June Half Year End

August Half Year End Results Announced

Annual General Meeting

The Annual General Meeting of Smithson Investment Trust plc will be held on 27 April 2023.

Share Price

The Company’s ordinary shares are listed on the London Stock Exchange. The price is given daily in the Financial Times and other

newspapers.

Change of Address

Communications with shareholders are mailed to the address held on the share register. In the event of a change of address or other

amendment this should be notified to the Company’s Registrar, Link Group, under the signature of the registered holder. The Registrar’s

address is listed on page 85.

Daily Net Asset Value

The daily net asset value of the Company’s shares can be obtained on the Company’s website at www.smithson.co.uk and is published

daily via the London Stock Exchange.

Profile of the Company’s Ownership

% of ordinary shares held at 31 December 2022

Shareholder Information

Further Information

31 December 2022

● Domestic Institutions Wealth Managers 76.09%

● Private Stakeholders/Investors 8.73%

● Foreign Institutions 4.33%

● Domestic Brokers 3.04%

● Directors and Investment Manager 1.47%

● Foreign Brokers 1.4%

● Corporate Stakeholders 0.82%

● Unknown 2.48%

● Shareholdings below threshold 1.64%

Smithson Investment Trust plc Annual Report for the year ended 31 December 202 2

76

Alternative Investment Fund Managers Directive Disclosures

Periodic Disclosures

As described in the Company’s Investor Disclosure Document (“IDD”) (which can be found on the Company’s website www.smithson.co.uk)

Fundsmith LLP (“Fundsmith”) and the Company are required to make certain periodic disclosures in accordance with the Alternative

Investment Fund Managers Directive (“AIFMD”). For the purposes of the AIFMD:

• None of the Company’s assets are subject to special arrangements arising from their illiquid nature.

• The Strategic Report and note 15 to the financial statements set out the risk profile and risk management systems in place. There

have been no changes to the risk management systems in place in the period under review and no breaches of any of the risk limits

set, with no breach expected.

• There are no new arrangements for managing the liquidity of the Company or any material changes to the liquidity management

systems and procedures employed by Fundsmith.

• There have been no changes to the maximum level of leverage that Fundsmith may employ on behalf the Company.

• There have been no changes to Fundsmith’s right of re-use of collateral or any guarantee granted under any leveraging arrangement

(insofar as there continues to be no right of re-use of collateral or any guarantees granted under the leveraging arrangement).

Leverage

For the purposes of the AIFMD, leverage is any method which increases the Company’s exposure, including the borrowing of cash and the

use of derivatives. It is expressed as a ratio between the Company’s exposure and its net asset value and can be calculated on a Gross

and a Commitment method. Under the Gross method, exposure represents the sum of the Company’s positions after the deduction of

sterling cash balances, without taking into account any hedging and netting arrangements. Under the Commitment method, exposure is

calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.

The table below sets out the current maximum permitted limit and actual level of leverages for the Company:

As a percentage of assets

Gross Commitment

method method

Maximum level of leverage 115% 115%

Actual level at 31 December 2022 Nil Nil

Material changes

There have been no material changes to the information set out in the Company’s IDD during the period covered by this Annual Report.

Remuneration Disclosure

Fundsmith LLP (Fundsmith), as the AIFM of the Company, is required to make this remuneration disclosure to the Company’s investors in

accordance with the AIFMD as incorporated into UK law and regulation.

The Company represents approximately 6% of Fundsmith’s total funds under management.

The financial period of the Company runs from 1 January to 31 December, whereas the financial year of Fundsmith runs from 1 April to

31 March. The latest financial year of Fundsmith is the year to 31 March 2022, and the figures disclosed below are taken from the financial

report and accounts for that period. These figures have been independently audited and filed with Companies House.

During the year ending 31 March 2022, Fundsmith employed an average of 42 staff in the year, with total remuneration, excluding pension

contributions, for those staff of £23,856,725 comprising fixed remuneration of £4,894,862 and variable remuneration of £18,961,863.

Further Information

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

77

Alternative Investment Fund Managers Directive Disclosures

The profits of the Firm are shared among the Members according to their profit-sharing arrangements. Fundsmith had an average of

9Members during the year who shared the Firm’s profit of £57,483,228.

The Members are the sole owners of Fundsmith, and the firm's capital is derived entirely from the Members contributions. Members are

each entitled to a pre-determined, fixed proportion of the business’s net profits, in accordance with their ownership of the Firm. Allocations

of profits to Members are not discretionary and these amounts are due to the Members because of their investment of capital and their

ownership of the business and is regarded as fixed, not variable remuneration.

The information above relates to Fundsmith as a whole, is not broken down by reference to this fund or the other funds managed by

Fundsmith and does not show the proportion of remuneration which relates to the income Fundsmith earns from the management of the

Company, as this would not reflect the way Fundsmith is organised.

The rules require Fundsmith to disclose both the amount of remuneration paid in total, and the amount paid to Remuneration Code Staff.

The Management Committee of Fundsmith has considered carefully which of its staff fall within the definition of Remuneration Code Staff.

The Management Committee has determined that for the AIFM Remuneration Code (SYSC 19B) the Remuneration Code Staff are those

individuals undertaking Senior management Functions that require approval by the FCA and any employee who is the lead investment

manager of a fund.

For the year to 31 March 2022 the only Remuneration Code Staff who are not Members of the Firm are the two portfolio managers of the

investment trusts, and Fundsmith has chosen not to disclose their aggregate remuneration of the basis of confidentiality.

Statement on the Alternative Investment Fund Managers Remuneration Code

The Company is classified as an Alternative Investment Fund (AIF). Fundsmith is duly authorised as an Alternative Investment Fund Manager

(AIFM) for the purpose of managing the Company. As an authorised AIFM, Fundsmith must adhere to the AIFM Remuneration Code.

The AIFM Remuneration Code contains a set of principles, which are designed to ensure that AIFMs reward their personnel in a way which

promotes sound and effective risk management, which does not encourage risk-taking, which supports the objectives and strategy of any

AIFs it manages, and which supports the alignment of interest between the AIFM, its personnel and any AIFs it manages (where this

alignment extends to the AIF’s investors).

Fundsmith’s Remuneration Policy is designed to ensure that it complies with the AIFM Remuneration Code.

A description of how the remuneration and benefits paid to Fundsmith staff and Members is set out in the Remuneration Policy disclosure

which is available on Fundsmith’s website.

Further Information

Smithson Investment Trust plc Annual Report for the year ended 31 December 202 2

78

Further Information

Alternative Performance Measures (“APMs”)

APMs are often used to describe the performance of investment companies although they are not specifically defined under IFRS. APM

calculations for the Company are shown below. The Board believes that each of the APMs, which are typically used within the investment

trust sector, provide additional useful information to shareholders in order to assess the Company’s performance between reporting periods

and against its peer group.

(Discount)/Premium

The amount, expressed as a percentage, by which the share price is more than/ less than the NAV per ordinary share.

As at 31 December As at 31 December

Page 2022 2021

NAV per ordinary share a 3 1,410.7p 1,961.0p

Share price b 3 1,308.0p 2,020.0p

(Discount)/Premium (b-a)/a (7.3)% 3.0%

Total return

A measure of performance that includes both income and capital returns. In the case of share price total return, this takes into account

share price appreciation and dividends paid by the Company. In the case of NAV total return, this takes into account NAV appreciation (net

of expenses) and dividends paid by the Company.

Year ended 31 December 2022 Page Share price NAV

Opening at 1 January 2022 a 3 2,020.0p 1,961.0p

Closing at 31 December 2022 b 3 1,308.0p 1,410.7p

Total return (b/a)-1 (35.2)% (28.1)%

Year ended 31 December 2021 Page Share price NAV

Opening at 1 January 2021 a 3 1,710.0p 1,648.9p

Closing at 31 December 2021 b 3 2,020.0p 1,961.0p

Total return (b/a)-1 18.1% 18.9%

Period from Company’s listing on

19 October 2018 to 31 December 2022 Page Share price NAV

Opening at 19 October 2018 a 3 1,000.0p 1,000.0p

Closing at 31 December 2022 b 3 1,308.0p 1,410.7p

Total return (b/a)-1 30.8% 41.1%

Annualised total return 6.6% 8.5%

Annualised total return

The annualised total return for a period is the average return earned on an investment in the Company’s shares for each year in that period,

expressed by reference to either share price or NAV.

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

79

Ongoing charges ratio and Total Cost of Investment

Ongoing charges ratio is a measure, expressed as a percentage of average NAV of the Company over a year, of the regular, recurring annual

costs of running an investment company (see note 4 and note 5 to the financial statements). The Total Cost of Investment measures cost

to investors incurred through the Company’s portfolio investment transaction costs (see note 5) and the recurring annual costs of running

the company.

Year ended Year ended

31 December 2022 31 December 2021

Ongoing charges ratio Page £’000 £’000

Average NAV a n/a 2,589,777 2,818,546

Annualised expenses b n/a 23,461 27,467

Ongoing charges ratio (b/a) 0.9% 1.0%

Annualised investment transaction costs c n/a 743 639

Annualised investment

transaction costs ratio (c/a) 0.03% 0.02%

Total cost of investment 0.93% 1.02%

Alternative Performance Measures

Further Information

Smithson Investment Trust plc Annual Report for the year ended 31 December 202 2

80

AIC

Association of Investment Companies

Alternative Investment Fund or “AIF”

An investment vehicle under AIFMD. Under AIFMD (see below) the Company is classified as an AIF.

Alternative Investment Fund Managers Directive or “AIFMD”

A European Union directive which came into force on 22 July 2013 and has been implemented in the UK.

Annual General Meeting or “AGM”

A meeting held once a year which shareholders can attend and where they can vote on resolutions to be put forward at the meeting and

ask directors questions about the company in which they are invested.

Cash Conversion

Ratio of a company’s cash flows to its net profit.

Custodian

An entity that is appointed to safeguard a company’s assets.

Discount

The amount, expressed as a percentage, by which the share price is less than the net asset value per share.

Depositary

Certain AIFs must appoint depositaries under the requirements of AIFMD. A depositary’s duties include, inter alia, safekeeping of the

Company’s assets and cash monitoring. Under AIFMD the depositary is appointed under a strict liability regime.

Dividend

Income receivable from an investment in shares.

Ex-dividend date

The date from which you are not entitled to receive a dividend which has been declared and is due to be paid to shareholders.

Financial Conduct Authority or “FCA”

The independent body that regulates the financial services industry in the UK.

Gearing

A way to magnify income and capital returns, but which can also magnify losses. A bank loan is a common method of gearing.

Gross assets

The Company’s total assets before the deduction of any liabilities.

Glossary of Terms

Further Information

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

81

Glossary of Terms

Further Information

Gross Margin

The amount of money a company has left after subtracting all direct costs of producing or purchasing the goods or services it sells.

Index

A basket of stocks which is considered to replicate a particular stock market or sector.

Investment company

A company formed to invest in a diversified portfolio of assets.

Investment trust

An investment company which is based in the UK and which meets certain tax conditions which enables it to be exempt from UK corporation

tax on its capital gains. The Company is an investment trust.

Leverage

An alternative word for “Gearing”.

Under AIFMD, leverage is any method by which the exposure of an AIF is increased through borrowing of cash or securities or leverage

embedded in derivative positions.

Under AIFMD, leverage is broadly similar to gearing, but is expressed as a ratio between the assets (excluding borrowings) and the net

assets (after taking account of borrowing). Under the gross method, exposure represents the sum of the Company’s positions after

deduction of cash balances, without taking account of any hedging or netting arrangements. Under the commitment method, exposure is

calculated without the deduction of cash balances and after certain hedging and netting positions are offset against each other.

Liquidity

The extent to which investments can be sold at short notice.

Net assets

An investment company’s assets less its liabilities

Net asset value (NAV) per ordinary share

Net assets divided by the number of ordinary shares in issue (excluding any shares held in treasury)

Ongoing charges ratio

A measure, expressed as a percentage of average net assets, of the regular, recurring annual costs of running an investment company.

Operating Profit Margin

The ratio of operating income to net sales. It measures profitability on a per-pound basis, after accounting for the variable costs of production

but does not include interest or tax expense.

Ordinary shares

The Company’s ordinary shares of 1p each.

Smithson Investment Trust plc Annual Report for the year ended 31 December 202 2

82

ROCE

Return On Capital Employed is a measure of the efficiency of a company at deploying capital to generate profits calculated as Earnings

Before Interest and Tax / Capital Employed

Portfolio

A collection of different investments held in order to deliver returns to shareholders and to spread risk.

Premium to NAV

The amount, expressed as a percentage, by which the share price is more than the net asset value per share.

Share buyback

A purchase of a company’s own shares. Shares can either be bought back for cancellation or held in treasury.

Share price

The price of a share as determined by a relevant stock market.

Total return

A measure of performance that takes into account both income and capital returns. This may take into account capital gains, dividends,

interest and other realised variables over a given period of time.

Treasury shares

A company’s own shares which are available to be sold by a company to raise funds.

Volatility

A measure of how much a share moves up and down in price over a period of time.

Glossary of Terms

Further Information

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

83

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Investment Platforms

The Company’s shares are traded openly on the London Stock Exchange and can be purchased through a stockbroker or other financial

intermediary. The shares are available through savings plans (including Investment Dealing Accounts, ISAs, Junior ISAs and SIPPs) which

facilitate both regular monthly investments and lump sum investments in the Company’s shares. There are a number of investment

platforms that offer these facilities. A list of some of them, that is not comprehensive nor constitutes any form of recommendation, can be

found below:

• AJ Bell Securities Limited

• Albert E Sharp LLP

• Alliance Trust Savings Limited

• Barclays Bank plc

• Hargreave Hale Ltd

• Hargreaves Lansdown Asset Management Limited

• iDealing.com Limited

• Interactive Investor Services Limited

• Shore Capital Stockbrokers Limited

• SVS Securities plc

• The Share Centre

Link Group – Share Dealing Service

A quick and easy share dealing service is available to existing shareholders through the Company’s Registrar, Link Group, to either buy or

sell shares. An online and telephone dealing facility provides an easy to access and simple to use service.

There is no need to pre-register and there are no complicated forms to fill in. The online and telephone dealing service allows you to trade

‘real time’ at a known price which will be given to you at the time you give your instruction.

To deal online or by telephone all you need is your surname, investor code, full postcode and your date of birth. Your investor code can be

found on your share certificate. Please have the appropriate documents to hand when you log on or call, as this information will be needed

before you can buy or sell shares.

For further information on this service please contact: www.linksharedeal.com (online dealing) or 0371 664 0445† (telephone dealing).

† Calls are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom are charged at the applicable

International rate. Lines are open from 8.00 a.m. to 4.30 p.m. Monday to Friday excluding public holidays in England and Wales.

How to Invest

Further Information

84

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Risk Warnings

• Past performance is no guarantee of future performance.

• The value of your investment and any income from it may go down as well as up and you may not get back the amount invested. This

is because the share price is determined, in part, by the changing conditions in the relevant stock markets in which the Company

invests and by the supply and demand for the Company’s shares.

• As the shares in an investment trust are traded on a stock market, the share price will fluctuate in accordance with supply and demand

and may not reflect the underlying net asset value of the shares; where the share price is less than the underlying value of the assets,

the difference is known as the ‘discount’. For these reasons, investors may not get back the original amount invested.

• Although the Company’s financial statements are denominated in sterling, most of the holdings in the portfolio are currently

denominated in currencies other than sterling and therefore they may be affected by movements in exchange rates. As a result, the

value of your investment may rise or fall with movements in exchange rates.

• Investors should note that tax rates and reliefs may change at any time in the future.

The value of ISA and Junior ISA tax advantages will depend on personal circumstances. The favourable tax treatment of ISAs and Junior

ISAs may not be maintained.

How to Invest

Further Information

85

Smithson Investment Trust plc Annual Report for the year ended 31 December 2022

Directors

Diana Dyer Bartlett (Chairman)

Lord St John of Bletso

Jeremy Attard-Manche

Denise Hadgill

Registered Office and Directors’ business

address

6th Floor

125 London Wall

London

EC2Y 5AS

Investment Manager

Fundsmith LLP

33 Cavendish Square

London

W1G 0PW

Broker

Investec Bank plc

30 Gresham Street

London

EC2V 7QP

Legal advisers

Travers Smith LLP

10 Snow Hill

London

EC1A 2AL

Statutory Auditor

Deloitte LLP

Saltire Court

20 Castle Terrace

Edinburgh

EH1 2DB

Company Secretary

Apex Listed Companies Services (UK) Limited

(formerly Sanne Fund Services (UK) Limited)

6th Floor

125 London Wall

London

EC2Y 5AS

Administrator

Northern Trust Global Services Limited

50 Bank Street

Canary Wharf

London

E14 5NT

Depositary

Northern Trust Investor Services Limited

50 Bank Street

Canary Wharf

London

E14 5NT

Authorised by the Prudential Regulation Authority and regulated

by the Financial Conduct Authority and the Prudential Regulation

Authority.

Registrar and Receiving Agent

Link Group

10th Floor Central Square

29 Wellington Street

Leeds

LS1 4DL

Registered in England no. 11517636

www.smithson.co.uk