Smithson’s plan to end the discount: convert into an OEIC and offer a cash exit
Smithson Investment Trust has drawn a line under years of discount frustration. The Board is recommending a full conversion into an open-ended fund – the Smithson Equity Fund – run by the same manager (Fundsmith) and following the same strategy. Shareholders will be able either to roll over into the OEIC and deal at net asset value (NAV) daily, or elect for a cash exit at NAV less costs.
This is a big structural move aimed squarely at eliminating the persistent discount to NAV. Two general meetings are scheduled for 10 February 2026 and 27 February 2026 to approve and implement the Scheme. The circular and details are on the company’s site:
What shareholders are voting on – and why it matters
What’s changing
- Conversion to an open-ended investment company (OEIC) named Smithson Equity Fund.
- Rollover option into the OEIC or a cash exit option at NAV less costs.
- Same investment strategy and management team (Fundsmith), but daily dealing at NAV removes the trust discount/premium dynamic.
Why now
- Despite one of the sector’s most aggressive buyback campaigns – 69.7 million shares repurchased since April 2022 (about 39.3% of the pre-programme share count) – the discount averaged 10.3% during 2025 up to the restructuring announcement.
- Post-announcement, the discount narrowed sharply to an average 3.2%, and ended the year at 2.2%.
- The Board sees no imminent change in market dynamics favouring small and mid caps, so is prioritising certainty of value for shareholders.
Key risk if the Scheme fails
The Board cautions that if the Scheme is not approved, the discount could widen again and liquidity may deteriorate. FCA approval for the OEIC and prospectus has been received; shareholder approval is the remaining gating item.
2025 at a glance: NAV lagged the index, but the discount narrowed
| Metric | 31 Dec 2025 | 31 Dec 2024 |
|---|---|---|
| Net assets | £1,720.5 million | £2,129.9 million |
| NAV per share | 1,601.5p | 1,631.8p |
| Share price | 1,566.0p | 1,484.0p |
| Discount to NAV | 2.2% | 9.1% |
| NAV total return (2025) | (1.8)% | 2.1% |
| Share price total return (2025) | 5.6% | 4.9% |
| MSCI World SMID Cap total return (2025) | 10.2% | 11.5% |
| Ongoing charges ratio | 0.90% | 0.90% |
Smithson reported a total loss after tax of £62.8 million for the year, comprised of a £67.4 million capital loss and a £4.6 million revenue profit. The share price rose due to discount narrowing, even as the NAV slipped.
Manager’s take: quality lagged while AI-exposed names roared
Fundsmith’s review is candid. The strategy of owning high-quality small and mid caps underperformed in the second half, while lower-quality and loss-making stocks surged. Pockets tied to Artificial Intelligence (AI) were especially strong: a basket of the top 100 AI-exposed names in the reference index rose 44% in H2, according to the manager’s analysis.
Smithson remains underweight the AI theme by the manager’s estimate (about 5% exposure), but owns several beneficiaries including Vertiv (custom cooling and power for data centres), Halma, Diploma and Reply. The manager warns signs of speculation are visible, so exposure will be valuation-led and selective.
On the flipside, Smithson also holds deliberately “non-AI” defensives like Clorox, and a set of software names the market fears could be disrupted by AI. The manager argues those fears are overdone, and notes valuations for many software holdings are at historic lows.
Portfolio metrics, moves and what did well – and badly
Standout portfolio quality and improving value
- Portfolio ROIC: 31% (up from 26% in 2024).
- Gross margin: 64%; operating margin: 25%; cash conversion: 99%; interest cover: 54x.
- Neutral free cash flow yield: 3.7% vs index at 3.3% – first time the portfolio is cheaper than the index, per the manager.
Trading and turnover
- Discretionary turnover was 49% (excluding sales to fund buybacks); dealing costs just 0.02% of NAV.
- New positions in H2 included Adma Biologics and Nutanix; sales included Verisk, Exponent and Choice Hotels.
Biggest contributors and detractors in 2025
- Top contributors: Vertiv (+1.6%), Diploma (+1.5%), Medpace (+1.1%), Halma (+1.0%), Verisign (+0.7%).
- Top detractors: Sabre (-2.2%), Clorox (-1.6%), Paycom Software (-1.3%), Doximity (-0.9%), Choice Hotels (-0.9%).
Where the portfolio is positioned
- Sectors: Information Technology 30%, Industrials 29%, Health Care 21%, Consumer Discretionary 7%, Consumer Staples 6%, Financials 4%, Materials 2%, Cash 1%.
- Regions (by listing): USA 49%, Italy 13%, UK 13%, Germany 7%, Japan 3%, Sweden 3%, Denmark 3%, New Zealand 3%, Switzerland 2%, Belgium 2%.
- Revenue exposure: North America 53%, Europe 24%, Asia Pacific 17%, EMEA 4%, Latin America 2%.
Dividends, costs and capital actions
- Dividend: 2.1p per share announced for the 18-month period to 30 June 2026, payable 20 February 2026 to holders on the 23 January 2026 record date.
- Costs: Ongoing Charge Figure 0.90%; Total Cost of Investment 0.92%.
- Buybacks: 23.1 million shares repurchased in 2025; 69.7 million since April 2022. A £500 million reduction of the share premium account was approved to boost distributable reserves for buybacks.
With the restructuring announced on 12 November 2025, buybacks have ceased.
What this means for retail investors
Positives
- Discount removal: In an OEIC you deal at NAV daily, so the persistent discount should disappear.
- Continuity: Same manager and strategy. If you still believe in quality small and mid caps, you can roll over.
- Choice: Prefer to exit? There’s a cash election at NAV less costs.
Watch-outs
- Vote risk: If shareholders do not approve the Scheme, the Board expects the discount may widen and liquidity could suffer.
- Market style headwinds: The strategy underperformed in 2025 versus the MSCI World SMID Index. If speculative pockets keep leading, patience may be required.
On balance, moving to an OEIC looks shareholder-friendly. It tackles the core problem – a stubborn discount – without changing the investment philosophy. The cash option also sets a floor under value for those who want out.
Dates, documents and next steps
- General meetings: 10 February 2026 and 27 February 2026.
- Dividend payment: 20 February 2026 (record date 23 January 2026).
- Restructure details and circular: smithson.co.uk/restructure-proposal
Final thought: the portfolio’s quality metrics remain strong and the manager argues it’s now cheaper than the market on free cash flow yield. If the Scheme goes through, holders get rid of the discount drag. If not, the Board itself warns the discount could widen. The vote will decide which path Smithson takes from here.
