The initial public offering of Smithson Investment Trust (LSE: SSON) was one of the biggest launches the investment trust sector has ever seen. Backed by Terry Smith, the manager of the £22.5 billion Fundsmith Equity Fund, Smithson had no trouble raising £822 million from investors who queued up to back its small- and mid-cap investment strategy. Its assets under management have since expanded to £2.3 billion.
Smithson pursues a version of Fundsmith Equity’s quality and growth investment strategy, targeting companies that might not fit into the larger fund. The trust’s own website proclaims, “We aim to provide you with a similar investment experience to the Fundsmith Equity Fund, being a superior risk-adjusted return over the long term, but by investing in a group of global small- and mid-capitalisation listed companies.”
Unfortunately, the trust has struggled since its inception. Net asset value (NAV) has grown 8.2% annually since 2018, compared with 8.3% for the MSCI World SMID index. Thanks to the widening discount, the stock price has returned just 6.6%, lagging the index by 1.7% per annum. Last year the gap widened further. The trust returned 2.1% on a NAV basis, compared with a 11.5% gain for its benchmark.
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As the discount to net asset value has widened, the trust has devoted more cash to share buybacks. In fact, since 2022, Smithson has spent more cash buying back its own shares than anything else. It has repurchased £500 million of stock over the past few years, or £10 million a week (by comparison, its largest position, Diploma, is about £115 million). Despite this outlay, it still trades at a double-digit discount.
A shift in strategy for Smithson Investment Trust
In an attempt to revitalise performance, manager Simon Barnard has recently redefined the trust’s strategy to focus on the smaller end of the £500 million – £15 billion market-cap range the company has focused on in the past. Here there’s more scope to find the multi-bagger companies of the future, the team believes.
This could be too little, too late. Despite the trust’s aggressive buybacks, Smithson’s wide discount to net asset value is a worrying sign. Investors are not lining up to buy the shares as they once were. Moreover, Smithson’s underperformance has attracted the attention of Saba Capital, the New York hedge fund that’s been agitating for change across the investment trust sector. Recently, Saba Capital Income and Opportunities Fund II filings revealed it had bought total return swaps, giving it an economic interest of £7.4 million in Smithson as of 31 October. It’s not clear if Saba still owns a stake, but based on its past actions, Smithson is ripe for Saba’s style of activism.
Smithson may have to hold another continuation vote
Saba isn’t the only threat to Smithson’s longevity. Terry Smith, who is one of Smithson’s largest investors as well as the majority owner of Fundsmith, has acted in the past to close a trust carrying his name that has not lived up to expectations. He closed the Fundsmith Emerging Equities Trust in 2022 after its discount widened to 14.9%.
This year the trust will be required to hold another continuation vote if the discount exceeds 10%. It already had to do the same in 2024, although the board caused an almighty row when it initially decided against holding a vote, even though the double-digit discount required it. Overall, 9.6% of votes were cast against continuation last time. The votes in favour were more than enough to prevent a winding up, but that number can’t be taken for granted.
Smithson was launched with a clear brief in mind, but despite Fundsmith’s record, the managers have not been able to replicate the success of Smith’s large-cap focused Fundsmith Equity Fund. The trust’s hefty fees (0.9%), underperformance and persistent discount suggest its future is limited. Investors may be better off seeking small-cap growth elsewhere.
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