Smithson backtracks on continuation vote snub

Smithson, the small and mid-sized companies investment trust from Terry Smith’s investment manager Fundsmith, will now hold a continuation vote at its next annual general meeting, scheduled for 25 April 2024.  

The board has delivered a screeching U-turn after initially saying that a continuation vote would not be necessary, with chair Diana Dyer Bartlett arguing that the high discount predominantly reflected broader market condition and the trust’s discount was lower than the average of its peers.    

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

The prospectus of the trust states that if the average discount to net asset value (NAV) over a financial year is more than 10%, then the board must consider whether to propose a continuation vote at the annual general meeting. 

Over the course of 2023, the discount averaged 10.7%, forcing the board to consider a continuation vote.  

Continuation votes are a permanent feature for some trusts, occurring once a year or every two, three or five years. They require a simple 50% majority to pass, and then the board must put forward plans for the trust, such as a merger or change in investment approach (50% majority required) or liquidation (75% super majority needed).  

• Smithson board rejects continuation vote despite discount pledge
• Where pro fund buyers are investing their ISAs this year

In other cases, a continuation vote is triggered if a trust persistently performs poorly or has traded on a wide discount for long periods. The former usually leads to the latter. In addition, a continuation vote can be called by disgruntled shareholders. 

If shareholders vote to wind up a trust, they could receive the net asset value of their investments and effectively close the discount.  

Smithson faced criticism after initially rejecting a continuation vote. Numis, the investment trust analyst, said this decision was “disappointing” while Capital Gearing manager Peter Spiller told financial publisher Citywire that it was “horrifying”.  

Justifying the backtrack, the board said: “Subsequent feedback from certain shareholders has, however, emphasised the value to them of a continuation vote as a point of principle. The board has therefore determined that an ordinary resolution in favour of continuation will be included in the notice of AGM. 

• ISA ideas: out-of-form areas pros think will make a comeback
• Ian Cowie: ignore the doom-mongers, 32 trusts are in ISA millionaires’ club

“The board thanks those shareholders with whom it has engaged on this matter for their constructive input and support of the company and looks forward to maintaining an open dialogue with investors going forward.” 

Since launch in late 2018, Smithson’s share price has risen 39%. That is ahead of the 29% return for the typical small and mid-sized shares investment trust, at 29%, but behind the 51% return for the MSCI World Small and Mid-cap index. Its discount to NAV is currently 12.5%.  

Smithson is attempting to manage the discount by buying back shares. In 2023, it repurchased £159 million of shares, 6.8% of share capital, at an average discount of 10.8%. This added £18 million to the trust’s NAV, or 0.72% of net assets.