Smithson board rejects continuation vote despite discount pledge

The board of Smithson Investment Trust has decided not to hold a continuation vote, after it was forced to “consider” one due to the wide discount on the trust last year. 

According to the trust’s prospectus, if the average discount to net asset value (NAV) over a financial year is more than 10%, then the board must consider whether to propose a continuation vote at the annual general meeting. 

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Smithson’s annual report for the 2023 financial (and calendar) year showed that the average discount was 10.7%.  

While the NAV rose 13.3% over the period, which was ahead of the 9.1% gain for small and mid-cap equities (the MSCI World SMID Cap Index is its benchmark), the share price rose just 8.2%, leading to the discount widening. The discount is currently 12%.  

Chair of the trust Diana Dyer Bartlett argued that the high discount predominantly reflected broader market conditions. She adds that the trust’s discount is lower than the average of its peers.   

Dyer Bartlett said: “This is therefore a market problem rather than being specific to the company. This decision additionally reflects the company's strong NAV performance over both the short and long term (both in absolute terms and relative to the comparator index) as well as the board's confidence in the future prospects of the company.” 

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Therefore, she said it “would not be appropriate” to put a continuation vote to the AGM. 

However, Numis, the investment trust analyst, said this decision was “disappointing”.  

It said: “We believe it is best practice to put forward the vote if the condition is triggered, even if the directors believe the discount is a ‘market problem’ or they are confident it will pass. It can be a powerful message at a difficult time if shareholders give the fund a vote of confidence, while if some shareholders were to vote not to continue, we believe it is useful for the board to be shown and understand these views directly.” 

Some trusts give shareholders the option of voting on whether it should continue or be wound up. Under the latter scenario, shareholders are paid their share of the company’s assets at NAV, rather than the current share price. 

Continuation votes are a permanent feature for some trusts, occurring once a year or every two, three or five years.    

In other cases, a continuation vote is triggered if a trust persistently performs poorly or has traded on a wide discount for long periods. The former usually leads to the latter. In addition, a continuation vote can be called by disgruntled shareholders. 

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Smithson is attempting to manage the discount by buying back shares. In 2023, it repurchased £159 million of shares, 6.8% of share capital, at an average discount of 10.8%. This added £18 million to the trust’s NAV, or 0.72% of net assets. 

Numis said this showed it is committed to buying back shares as its repurchases were among the largest in its peer group last year.  

Last year was the fifth anniversary of the launch of Smithson. Since launch in October 2018, it has returned 37% on a share price basis, ahead of the 28% average return for small and mid-cap equity investment trusts, but behind the 50% gain of the MSCI World SMID Cap index.  

It attempts to follow the same investment philosophy of Terry Smith’s Fundsmith Equity: buy good companies, do not overpay and then do nothing.