Smithson (SSON ) has ducked going to its shareholders for a vote on whether the global fund should continue, even though its shares breached the trigger point of a double-digit discount last year.

According to the prospectus that accompanied Smithson’s launch in October 2018, its board must consider giving shareholders a continuation vote after four years if its shares trade at an average of more than 10% below net asset value (NAV) in a financial year.

The 2023 annual report published today confirmed that the £2.2bn investment trust narrowly exceeded the threshold last year, trailing at an average 10.7% discount to NAV. 

However, Diana Dyer Bartlett, the trust’s chair, dismissed the idea, saying the discount was narrower than that of Smithson’s rivals and that performance had improved after a challenging 2022, which resulted in the shares plunging by more than a third.

Dyer Bartlett said the board had discussed the situation with its advisers and Fundsmith, its fund manager led by Terry Smith, and concluded it would not be appropriate to put a continuation vote to the annual general meeting (AGM) in April.

‘In making this decision, the board noted that the level of discount predominantly reflects broader market conditions and the fact that the company’s discount, albeit higher than the board would like, is lower than the average of its peers. This is therefore a market problem rather than being specific to the company,’ she told shareholders.

‘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.’

Over the year, the global mid-cap equities fund’s NAV grew 13.3%, beating the 9.1% of the MSCI World SMID index, although the shares returned just 8.2% as a result of the discount, which currently stands at 12%.

‘Disappointing’ decision

Analysts criticised the decision. Ewan Lovett-Turner of broker Deutsche Numis, which included Smithson in six new recommendations this month, said it was disappointing and an ‘own goal’ by the board and that best practice would have been to have the vote and demonstrate shareholder democracy.

‘There is minimal/negligible additional financial cost of putting the resolution to the AGM,’ he said. ‘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, it is useful for the board to be shown and understand these views directly.’

Peel Hunt’s Anthony Leatham said: ‘ Many will consider this to be an important discount control measure and, while the NAV was strong over the reporting period, the discount volatility detracted from returns, resulting in benchmark underperformance over the 12 months and the last five years.’

The company’s fact sheet shows that since launch up to 31 January, the underlying NAV return was 56.9%, beating the MSCI World SMID’s 44.6%, but the lagging shares delivered only 40.1%.

The board has, however, committed to share buybacks to tackle the discount, buying back £159.3m, or 6.8%, of stock last year, to add about £18m to NAV asset value.

A ‘return to form’

Dyer Bartlett said it was a ‘pleasing return to form’ after the shocking performance in 2022 when the shares plummeted 35%. She shared the optimism of Fundsmith manager Simon Barnard who said in January the portfolio was in the ‘best shape it has been since inception’.

A former finance director, Dyer Bartlett also sits on the boards of Mid Wynd International (MWY ) and Schroder British Opportunities (SBO ). Almost a quarter (24%) of shareholders at last year’s AGM voted against her re-election, which the company said reflected concerns over the lack of ethnic diversity of the four-strong board.

The three other non-executive directors are hereditary peer Anthony Tudor St John, Jeremy Attard-Manche, a former chief executive of hedge fund manager Noster Capital, and Denise Hadgill, a former managing director at BlackRock.