Has Saba gained control of Terry Smith's fund?

Terry Smith, the fund manager, is under pressure from activist investor Saba Capital to make his Smithson Investment Trust an open-ended fund Will Smith comply?

In an attempt to address the Smithson Investment Trust's ongoing discount, Terry Smith, CEO and chief investment officer of Fundsmith, has given in to pressure from activist investor Saba Capital and suggested converting it to an open-ended fund.

On November 12, the news caused shares of Smithson Investment Trust (LON:SSON) to increase by more than 7%.

The investment trusts discount to net asset value (NAV) decreased from approximately 9 percent to 2.7 percent as a result of the gains. Since June 2023, the Smith's discount has been at least 9%.

"The current investment trust structure does not guarantee that Smithson shareholders can realize their investment at NAV, even though we firmly believe that applying Fundsmiths' investment strategy to small and mid-sized companies will achieve the objective of delivering investors with long-term growth in value," Smith stated.

"We therefore think that moving the assets to an OEIC structure is in the best interests of all Smithson shareholders, permanently removing the persistent discount," he continued.

With a roughly 15% stake in Smithson, Saba Capital, a New York-based activist investor that had previously tried to replace the board of seven UK-based investment trusts, had been using its position to persuade the trusts board to address the discount.

In an interview with AJ Bell's head of markets, Dan Coatsworth, Smith stated, "We launched this as an investment trust but the problem is it hasn't worked."

Smith claimed that Saba was the driving force behind the change and that he "agreed with the activist investor that change was required." The management of the trusts had been trying to reduce the trusts discount by repurchasing 40% of its own shares, but this had not succeeded.

Coatsworth remarked, "It's interesting to hear an asset manager agree with Saba, given how others on the receiving end of the activist campaigns have been less welcoming."

What is the Smithson conversion proposal?

Smithson suggests turning the existing investment trust into an open-ended fund with the same focus and approach.

Smithson will give shareholders the choice of rolling their holdings into the new "New Smithson" vehicle or withdrawing all of their investments at near NAV. Simon Barnard will continue to oversee the New Smithsons portfolio, which will adhere to its long-term investment strategy in multinational mid- and small-cap firms.

A "significant cost contribution" will be made by Smithson to guarantee that investors can exit or roll over their shares at nearly NAV.

By January 31, 2026, Smithson Investment Trust plans to release a circular with additional information about the plan, including the dates of the general meetings where shareholders will cast their votes. It anticipates finishing the plan by March 31.

Unlike funds with a closed end (i.e. The e. investment trusts), open-ended funds are prohibited from trading below or above their NAV.

In the event of a downturn, fund managers may have to sell their holdings, which could be a drawback.

However, Smith told AJ Bell that this shouldn't be a problem because the median company in the fund has a market capitalization of 8 billion as opposed to the fund's market capitalization of 2 billion.

Smith stated, "We wouldn't suggest entering an OEIC if we anticipated a liquidity issue."

Are discounts on investment trusts unusual?

Investment trust managers have been under pressure from Saba Capital to take a number of corporate actions by offering large and consistent discounts.

Early in 2025, it attempted to replace the boards of seven trusts with its own appointees, but was unsuccessful. After that, Saba changed its approach to turn trusts into different kinds of funds.

However, discounts in investment trusts are not unusual, and many of the discounts in the trusts Saba has targetedincluding Smithsonare comparable to those in their competitors.

The average discount for all investment companies as of November 12th is -13.70 percent, according to data from the Association of Investment Companies, an industry association that represents investment trusts (excluding 3i, which is so big as to distort the data). Investment trusts in the global small cap sector have an average discount of -9.4%. It should be noted that this figure is based on the narrowing of Smith's discount, so it would have been higher prior to the rollover.

Smith informed Coatsworth that small caps are generally unpopular in the current market. "NAV discounts are common in all industry strategies," he continued.