Terry Smith, CEO of Fundsmith, has succumbed to pressure from activist investor Saba Capital and has proposed rolling the Smithson Investment Trust over into an open-ended fund in a bid to address its persistent discount.
Shares in Smithson Investment Trust (LON:SSON) gained over 7% on 12 November as the news broke.
The gains saw the investment trust’s discount to net asset value (NAV) narrow from around 9% to 2.7%. Smithson’s discount had been 9% or wider since June 2023.
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Saba Capital, an activist investor based in New York which previously attempted to replace the board of seven UK-based investment trusts, held an approximately 15% stake in Smithson and had been using this position to influence the trust’s board to address the discount.
“We launched this as an investment trust… but the problem is it hasn’t worked,” said Smith in an interview with Dan Coatsworth, head of markets, AJ Bell. “It’s been trading at a persistent discount.”
Smith “agreed with the activist investor that change was required” and said Saba had been the catalyst for making the change. The trust’s management had been attempting to narrow the trust’s discount by buying back 40% of its own shares, but that hadn’t narrowed the discount.
“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,” said Coatsworth.
What is the proposed Smithson conversion?
The proposal from Smithson is to convert the current investment trust into an open-ended fund that will maintain the same strategy and focus.
Smithson will offer shareholders the option of either withdrawing all their investments at close to NAV, or rolling their holdings into the new vehicle – dubbed “New Smithson”. New Smithson’s portfolio will continue to be managed by Simon Barnard and will stick to its strategy of long-term investments in global mid- and small-cap companies.
Smithson will make a “significant cost contribution” to ensure that investors exiting or rolling over their shares are able to do so at close to NAV.
Smithson Investment Trust intends to publish a circular including further details about the scheme, including timings of the general meetings at which shareholders will vote on the proposal, no later than 31 January 2026. It expects to have the scheme completed by 31 March.
Unlike closed-ended funds (i.e. investment trusts), open-ended funds can’t trade at a discount, or a premium, to their NAV.
There are possible downsides – fund managers can be forced to sell holdings in the event of a downturn.
But given the median company in the fund has a market cap of £8 billion, compared to the fund’s market cap of £2 billion, Smith told AJ Bell that this shouldn’t be an issue.
“If we thought there would be a liquidity problem we would not propose going into an OEIC,” said Smith.
Are investment trust discounts unusual?
Saba Capital has been using wide, persistent discounts to pressure investment trust managers into taking various corporate steps.
Initially, it failed to replace the boards of seven trusts that it targeted early in 2025 with its own appointees. Saba then shifted its strategy towards converting trusts into other types of fund.
But investment trust discounts are not uncommon – and many of the discounts in the trusts Saba has targeted, including Smithson, are similar to those of their peers.
Data from the Association of Investment Companies, an industry body that represents investment trusts, shows that the average discount across all investment companies as of 12 November (excluding 3i, which is so large as to distort the data) is -13.70%. The average discount for investment trusts in the global small cap sector is -9.4% (note that this figure comes after the narrowing of Smithson’s discount so would have been higher before news of the rollover broke).
Small caps are widely out of favour in the current market, Smith told Coatsworth. “The discount to NAV is prevalent across all strategies across the industry,” he added.
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