Smithson trust seeks to go open-ended as Saba looms

Smithson manager Simon Barnard.

Smithson Investment Trust Ord (LSE:SSON), the global small cap investment trust managed by Fundsmith, has proposed to restructure into an open-ended fund in response to its share price discount to net asset value (NAV).

Plans set out by the board and subject to shareholder approval would see the trust’s assets rolled over into an open-ended fund with the same strategy and investment manager.

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If the change goes ahead, investors will have the option of either moving into the new fund or getting a full cash exit at NAV, minus any costs that exceed a contribution from Fundsmith.

Smithson chair Mike Balfour said the board was “acutely aware of the persistent discount to NAV at which the company’s shares have traded since early 2022, with demand for the company’s shares impacted by a number of factors, including relative underperformance, in part due to the manager’s style being out of favour”.

He noted that a substantial buyback programme from the £1.6 billion market cap trust had not solved the problem. The discount came to 8.9% on 11 November.

A rollover into an open-ended fund would come as a victory for US activist investor Saba, which has become known as a major Smithson shareholder in recent weeks. Saba has previously pushed for other such moves that would allow it to exit a trust at NAV, including the recent conversion of the Middlefield Canadian Income trust into an exchange-traded fund (ETF).

The board noted that Saba, which has a 16.1% stake in the trust, intends to vote in favour of the overhaul. Terry Smith, who has 2.3% of the trust’s voting rights, also plans to back the rollover, with “another significant shareholder” also indicating its support.

Terry Smith issued a statement, saying: “Whilst we firmly believe that applying Fundsmith’s investment strategy to small and mid-sized companies will achieve the objective of delivering investors with long term growth in value, the current investment trust structure does not guarantee that Smithson shareholders can realise their investment at NAV and discounts to NAV have become the norm in the sector."

"We therefore believe that transferring the assets to an open-ended structure is in the best interests of all Smithson shareholders, permanently removing the persistent discount."

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The move to an open-ended structure shouldn’t cause huge problems for the investment team. They haven’t tended to make use of gearing, while Morningstar data indicates that the trust’s biggest position at the end of June, in Diploma (LSE:DPLM), accounted for around 6% of the portfolio.

This seems comfortably far from the 10% limit on individual positions mandated under the UCITS diversification rules that would apply to an open-ended Smithson entity.

A bigger issue is performance: the underlying portfolio has returned just 8.3% over five years, versus 16.4% for the average name in the Association of Investment Companies’ (AIC) Global Smaller Companies sector.

Smithson manager Simon Barnard recently spoke to interactive investor about performance issues and the outlook for his asset class of choice.