Smithson (SSON), the £1.6bn investment trust overseen by star fund manager Terry Smith, is to liquidate and turn itself into an open-ended fund.

The sensational decision follows Saba Capital building a 16% stake ahead of a possible continuation vote next year that could have given the activist hedge fund scope to apply pressure on the board. As we first reported, it scooped a 14% position in Smithson in September.

Smithson said it would offer shareholders the choice of withdrawing all their money at close to net asset value (NAV) or switching into Smithson Equity Fund, or “New Smithson”, a new open-ended investment company that will be run by Smithson’s manager Simon Barnard.

It said this was in response to the discount, currently 9%, that has dogged the investment trust for three years despite the company buying back 39% of its shares.

The shares jumped nearly 7% to a three-and-a-half year high of £16.32.

Chair Mike Balfour said: “The board has decided upon this proposal after a period of careful consideration of a range of options aimed at optimising value for shareholders. Whilst the board is confident in SSON’s investment strategy and manager, the directors are also highly cognisant of the discount to NAV which has been entrenched for some years and the need therefore to take action to restore value to shareholders.”

Saba has said it will vote in favour of the wind-down and relaunch, due to complete by next March. This will be its biggest “win” after changing strategy greatly expanding its investment company stakes after failing to gain control of any of its seven original targets at the start of the year.

Smith, the chief executive and chief investment officer of Fundsmith, Smithson’s fund manager, will use his 2.3% stake to back the restructuring and invest in the successor fund.

Another “significant shareholder” has also indicated its support.

Fundsmith contribution

Fundsmith has pledged to make a “significant cost contribution” to the reconstruction to ensure that there is no dilution of investors’ holdings if they roll into New Smithson.

It said the open-ended unlisted structure of New Smithson will eliminate the persistent discount as its share price should always match the underlying value of its assets.

Stifel analyst Iain Scouller said: “Whilst we think equity funds with relatively liquid assets should strive to keep their discounts at sub-10%, we think this proposal provides a blueprint as to the type of option that boards should consider in order to enhance shareholder value, in situations where discounts in excess of 10% persist over a long period of time.”

Winterflood analyst Shavar Halberstadt said Smithson was following Middlefield Canadian Income in adopting an open-ended structure, in its case an active ETF (exchange-traded fund), to allow Saba to exit at a profit, having also bought in at a big discount.

“Rather than hoarding assets, we commend the board for relinquishing control, and we recognise that there could be more to come,” he said.

Growth crash casualty

Launched in 2018, Smithson performed strongly for three years in a bull growth market that saw its shares peak at £20.20 at the end of 2021. They then crashed to £11.62 in the following June as interest rates and inflation soared. Up to the end of October, the underlying annual total return of 7.4% achieved by Barnard underperformed its benchmark, the MSCI World SMID index, which had returned 8.8% a year.

The effect of the discount, which meant the shares lagged the stocks portfolio, left shareholders with an annual return of 6.4%, creating an incentive to open-end the fund which should enable shareholders to enjoy the full performance in net asset value.

This marks Fundsmith’s full retreat from investment trusts having decided to liquidate the Fundsmith Emerging Equities Trust in 2022 after it also underperformed in its six years since launch. The move, while good for Smithson shareholders in the short term, deepens the gloom over the UK investment trust sector where average discounts have recently widened to 14% after narrowing slightly in the autumn.

Our view

James Carthew, head of investment company research at QuotedData, said: “We are always sorry to see money flow out of the sector but there wasn’t much point in Smithson being an investment company. No gearing, no private investments, a focus on “small caps” but the median £8bn market capitalisation would put most of the portfolio firmly into the FTSE 100 if it was listed in London. There were no derivatives, nothing creative with income generation or distribution, making this a pretty plain vanilla vehicle. Shareholders will lose by no longer having a board fighting in their corner. They’ll also suffer roughly 10% higher management charges as the fee will be based on NAV rather than market capitalisation, but otherwise things will stay the same.”