Pressure mounts on poorly performing £1.6bn global smaller companies trust overseen by star fund manager Terry Smith after activist hedge fund Saba Capital reveals a £229m holding.
Saba Capital has hiked its position in Smithson (SSON) to over 14%, putting the activist hedge fund in a strong position to challenge the £1.6bn global smaller companies fund overseen by star manager and chief investment officer Terry Smith.
While Saba has popped up on the registers of dozens of undervalued investment trusts, Smithson is its most high profile target since the activist hedge fund’s failed assault on the boards of seven investment companies in January.
A stock exchange filing yesterday showed New York-based Saba held 14.1% of the voting rights in the investment trust whose portfolio is run by Smith’s firm Fundsmith with Simon Barnard as lead fund manager.
Most of the £228.7m position is held in derivatives, known as total return swaps, rather than shares in the company. These contracts give Saba the benefits of shares without having to go into the market and buy them, although they expire at the end of November when they must be renewed if the trade is to be maintained.
The disclosure shows the holding had risen from 13.1% although yesterday’s statement was the first notification on the London Stock Exchange’s regulatory news service about Saba’s position in the widely-held London-listed fund.
The news is a blow to Smithson whose quality growth style has struggled badly against rising interest rates and inflation as well as some stock flops. Its £15.16 share price has fallen around 25% from its £20.20 peak at the end of 2021, despite recent signs of improved performance.
Barnard told The Times in January he thought Saba had sold the shares after taking “a little nibble” when the paper reported the firm’s disclosure of a small £7.4m investment in the previous October.
However, far from selling, Saba has expanded the position as Smithson shares have continued to trade well below the value of its investments, exacerbating investor disappointment with the poor performance that has seen the trust underperform its global benchmark since launch seven years ago.
Although it remains a comparatively small holding in Saba’s funds, such as the two US-listed Income and Opportunities funds run by founder Boaz Weinstein and manager Paul Kazarian, the firm is now the biggest investor in Smithson after redeploying gains from investments in around 30 UK trusts that had stalled on wide share price discounts.
This could put Smithson, which raised a record £822m at its flotation in 2018, in jeopardy. Its rules require the company to hold a continuation vote at its shareholders’ annual general meeting in April if its shares have traded at an average of more than 10% below their net asset value (NAV) in the previous calendar year.
The company was forced to do this last April and 12 months earlier in a sector downturn that has seen many investment trust shares slide to wide discounts to their NAVs.
While the vast majority of Smithson shareholders, who mostly include wealth managers and individual investors, have backed it to continue, a third vote next April could prove more challenging if Saba turns hostile.
Smithson shares currently stand on a 9% discount, but over 12 months the average has been nearly 11%, according to data from broker Deutsche Numis.
The trust’s board, chaired by Mike Balfour, and the fund managers will hope improved performance and the prodigious share buybacks the company have made in the past three years will keep the valuation gap in single digits, enabling them to avoid another cliff-hanger ballot in seven months’ time.
However, if the low rating persists and another vote is held, Saba is likely to demand a tender offer, or large share buyback, in return for its support.
A tender offer would let investors sell shares at close to their asset value, enabling Saba to make a tidy profit, as it has done in other trusts where it has exited after engaging with their boards, such as European Smaller Companies (ESCT), Montanaro UK Smaller Companies (MTU), Lowland (LWI) and CQS Natural Resources (CYN).
It also holds a maximum 30% stake in Herald (HRI), the global technology fund that was one of seven investment companies to beat off Saba’s attempt to gain control of their boards in the New Year. It sits in the same sector as Smithson.
The concerted public campaign to protect Herald and the other six trusts could serve as a template for Smithson should a similar showdown with Saba occur next year.
However, Saba has noticeably changed tack since its defeats at the general meetings in January, preferring to hold conversations with boards and managers in private as the value investor seeks to make money from the lengthy malaise gripping UK-listed funds.
Saba did not respond to a request for comment.
