- Fundsmith CEO Terry Smith tells AJ Bell that activist investor Saba was the trigger behind the proposal to turn Smithson Investment Trust into a fund
- Why the proposals go against the original thesis for Smithson
- What does it mean for shareholders?
Dan Coatsworth, head of markets at AJ Bell, comments:
“Terry Smith’s Fundsmith asset management business has bowed to pressure from activist investor Saba to find a way of eliminating a persistent discount on Smithson Investment Trust.
“This development could set a precedent for other trusts languishing below the value of their underlying holdings to follow suit. Saba tried a year ago to push four trusts to convert to open-ended status and one of them, Middlefield Canadian Income, has subsequently become an active ETF. Smithson is much higher profile, so it’s possible that other investment trust boards facing discount dilemmas might think that if the move is good enough for an industry name like Terry Smith, it’s worth considering.
“Open-ended funds trade in line with their assets and aren’t subject to premiums or discounts to net asset value.
Terry Smith sides with Saba
“Talking to AJ Bell*, Terry Smith was candid about the influence of Saba on the proposal to restructure the trust as an open-ended fund.
“He agreed with the activist investor that change was required, saying that Smithson had bought back 40% of the shares but that failed to eradicate the discount, hence why a different approach had to be considered.
“It’s interesting to hear an asset manager agree with Saba, given how others on the receiving end of the activist’s campaigns have been less welcoming.
Rewriting the ‘owner’s manual’
“Smithson has an ‘Owner’s Manual’ that spells out the reasons for being an investment trust, originally arguing the structure has the potential to deliver a better return than an open-ended mutual fund.
“This argument is predicated on the benefits of permanent capital. With investment trusts, the fund manager can focus on the stock picking without having to worry about inflows and outflows from investors.
“If there is a market sell-off, for example, there is a chance that swathes of investors pull their money out of an open-ended fund which would force the manager to sell down assets as their values were in decline. An investment trust in the same market sell-off might suffer a declining share price but they wouldn’t have to sell any assets.
Why does Smithson trade at a discount?
“Small caps have been out of favour for a long time which explains widespread discounts across the sector, including at Smithson.
“In recent years, investors have been wooed by the potential gains on offer from large companies, meaning that appetite for smaller companies has shrivelled up. That may not remain the case indefinitely, yet Fundsmith clearly feels its Smithson vehicle needed to do something to keep investors on side.
“It’s a surprise that Terry Smith hasn’t been more patient and waited for small caps to come back into favour, given that’s core to his investment style. However, Saba’s 15.2% stake clearly give it some influence, and Smith appears to have taken the view that doing nothing was unacceptable in this situation.
“If the proposals are approved by Smithson’s shareholders, it will mean Fundsmith exits the investment trust space completely. Three years ago, it wound up the Fundsmith Emerging Equities Trust after poor performance.
What does it mean for investors?
“Smithson will continue to have the same manager in Simon Barnard, and it will follow the same strategy, albeit in a proposed open-ended fund structure.
“Assuming the restructuring goes ahead, investors can exit at net asset value (minus costs) rather than the current discount, should they wish. For Saba, it essentially has a clear exit route whereby it has bought in cheaply and can get out at a fair value. That looks like easy money for the activist investor.
“Smithson would also no longer have to do the in-depth reporting that comes with being a listed company. Fundsmith Equity – the asset manager’s flagship fund – publishes a monthly factsheet that contains a few lines about performance and portfolio activity, but otherwise investors get a half-yearly shareholder letter which contains as much or as little as Terry Smith feels necessary. They also get a short form report every six months which is less detailed than a plc report. That might become the blueprint for Smithson.”
*You can watch AJ Bell’s full interview with Terry Smith here. If you would like to embed AJ Bell’s video interview in your article, then the embed code is available on request. Alternatively, you are welcome to use any quotes from the interview.
