Correction: Smithson is changing its name to “SNINVC” but the open-ended investment company that will succeed it will be called Smithson Equity Fund.
Smithson (SSON) is to change its name to “SNINVC” as the £1.6bn global smaller companies investment trust prepares to liquidate and convert to an open-ended investment company (OEIC) as part of the surprise reconstruction announced in November.
Shareholders will be asked to vote in two general meetings in London on 10 and 27 February to wind up the seven-year-old listed fund and to indicate how much, if any, of their money they want to roll over into the new Smithson Equity Fund, and how much to take in cash.
Deadlines for online votes start at 5 and 24 February respectively, the company said as it published a circular with all the details, but could be earlier for investors holding their shares on online platforms.
The decision to abandon Smithson’s “closed-end” investment trust structure, with a limited pool of capital, and relaunch as an open-ended fund with variable capital was in response to contact from Saba Capital.
The activist investor, which this week suffered a defeat in its second bid to take control of rival Edinburgh Worldwide (EWI), had recently built up a 16% stake and wanted the Smithson board to take more aggressive action to narrow the gap, or discount, between the share price and the underlying value of its investments.
The conversion to an OEIC will eliminate the discount which had seen the shares trail more than 10% below net asset value (NAV) for much of the last three years. That’s because as an open-ended fund Smithson Equity will normally trade at asset value. The discount has already shrunk to 3%, a process that began when Saba revealed it had hiked its holding to 14% becoming the largest shareholder.
The discount persisted despite Smithson buying back £993m of shares, or 39.3% of its issued capital, since April 2022, to rebalance supply and demand. That was a sign of investor disenchantment after the trust’s big losses in the growth crash of 2022/23.
Under fund manager Simon Barnard, the shares have shed 8.7% in the past five years with dividends included in the total return. Since launch in 2018 up to the end of last year, the US-weighted portfolio returned 60.2%, well below the 80.9% of its MSCI World SMID index benchmark.
Barnard will run the new fund with no change to his long-term approach to picking and holding quality growth stocks.
The board, chaired by Mike Balfour, said it continued to have conviction in the investment strategy and Fundsmith, the fund manager founded by chief investment officer Terry Smith to whom Barnard reports.
However, it recognised shareholders’ frustration with the discount that depressed their return.
The company said the conversion to an OEIC would not harm investors as Smithson “does not employ certain key attributes of the closed-end structure, such as gearing and investments in private assets, and given that the underlying portfolio is liquid (the median market capitalisation of the holdings in the company’s portfolio is c£6.18bn)”.
The board’s non-executive directors, who hold just 12,078 shares or 0.01% of the total, are voting for the reconstruction and recommending shareholders do the same. Fundsmith partners, including Smith, are also voting in favour with their 2.3%, as is Saba with its 16.1% holding.
During the reconstruction, Smithson’s assets will be divided into three: one small pool for the estimated £1.3m of costs and two larger pools for the cash that exiting shareholders will receive and another for the money that investors want to roll into the new fund.
A 2.1p per share dividend was also declared. This, the final payment by Smithson as an investment trust, will be paid on 20 February.
Our view
James Carthew, head of investment company research at QuotedData, said: “I am curious to see how large the rollover will be into the OEIC. The discount was wide because investors were frustrated with the trust’s performance and the OEIC retains the same manager and investment approach. In NAV terms Smithson ranked lowest in its peer group over three years and returns are negative over five years. There will still be some believers in the approach, but there is little likelihood of capital gains that need to be rolled over. It feels a shame to see so much money flowing out of the sector. I would have hoped that the board would have put more effort into finding a merger partner that would have made more use of the structure.”
