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So Terry, you've you've announced some changes to the structure of the Smithson Investment Trust, moving to an open-ended fund. Um what's the driver for this decision? Is, you know, this is quite a significant shift to uh you know, a product that was launched in 2018. Um, is this simply down to activist investor Syber Capital or is it something else?
Uh, no. Look, Sarabber has been the trigger for this. Um, but that's because what they're saying is something we agree with. They're right. Um, which is to say we launched this as an investment trust. Um, it invests in in small and midcap companies. Uh, so that you might think is a good structure for something that invests like that.
But the problem is it hasn't worked. And um you know there's a a great quote from Richard Feainman the guy who was a physicist who won the Nobel Prize worked on the Manhattan project and he said doesn't matter how smart you are or how elegant your theory is if it doesn't work in pract in experiment you're wrong and so yeah it's a structure that we liked for this and we devised using an investment trust for this but it hasn't worked in the sense that it's been trading at a persistent discount and when you've bought back 40% of the trust which we have been doing buybacks and it hasn't eradicated the discount you need to do something different don't you Otherwise, you get on to another quote from another great physicist, which is Albert Einstein saying to repeat the same action, expect a different outcome is a definition of insanity.
So, keeping on buying back shares wasn't working. So, we've proposed switching to an oink to an open-ended company because then it there can't be a discount. It will trade at NAV basically and everyone at any time will be able to get in or out at NAV. It downsides to being an open-ended fund i.e., You know, if you if it goes through a market downturn, you get redemptions from investors.
They want to take that money out. You know, the fund manager that Smithson will have be forced to sell holdings where actually on an investment trust structure. You know, there's benefits for permanent capital. Yeah. Look, you're absolutely right of course about that. Um, as it happens, I mean, the average company, the median company that we've got in the fund has got a market capitalization of 8 billion and the fund as we speak right now is under two billion.
So there isn't any liquidity problem. If we thought there was a liquidity problem, we would not propose going to a night because, you know, experimenting with liquidity of these things is uh is playing with fire, isn't it? So we're confident we could do it. What the industry probably should gravitate to but won't is having open-ended funds so you can guarantee you you anyone could trade at NAV at any time.
Um but with different dealing periods. So you know instead of having daily dealing for everything which you've got now having a dealing period which somewhat matches the underlying asset base. I mean, having a real estate open-ended fund with daily dealing is clearly nuts, as people have managed to demonstrate over time, having to gate their funds.
We should really shift to having different dealing periods, but there's no sign of the industry doing that. I mean, if we were to switch to a different dealing period, we wouldn't get be able to get onto a single platform in the UK, as you know. Is there been any suggestion that actually it's just down to you're picking the wrong stocks?
Not you personally, but obviously the manager for Smithson. Um, or is it, you know, we could look at it that small caps are just out of favor in general? I think if you look at it across the industry you know not just in this fund but there are other funds it's they're out of favor across the industry and also and when you look at the the discount which is really the discount to NAV which is what's driven this proposed change the the the discount to NAV is prevalent across all the strategies in the industry just about I can't think of one that hasn't got that now I think the the for good or ill the tide in the industry is very strongly in the other direction at the moment if you think what's the fastest growing product area in the industry it's ETFs ETFs are the diamet metric opposite of investment trust.
They they're av clue in the name exchange traded. You can trade intraday. You not even limited to once a day. So that's where the trend clearly is. Uh and so at the moment I think the problem isn't um our particular fund manager or even the fact that the strategy is out of favor. Yeah, I think the fund manager Simon is incredibly capable.
The strategy is definitely out of favor, but the whole industry's got the discount problem. So if the whole industry has a problem, isn't it just a case of it's you history suggests you be patient, you wait, small caps will come back into fashion and also you're not really small you're you're more midcap really small cap isn't it?
So um surely it it feels like you you you're giving up now when actually are you giving up at the bottom of you know the the sentiment is so weak towards small cap surely better to wait. We're not giving up on the strategy at all. I mean, I would agree with you if we said we're closing down and going home now.
We're folding up our tent and we're not. We're carrying on with the strategy. We're just changing the structure of the vehicle. And I think we're going for the structure of the vehicle because we can't see a way notwithstanding whether the strategy is going to come back or not going to come back to eradicate the discount.
Plus, I mean, do bear in mind that we have got, you know, if you if you think that we should be actually persisting with the investment trust structure in this, we we'll put you in to explain to Mr. Bose at at SA why that's a good idea because he doesn't seem to think it is. And to be fair to him, he does have an investment in about 17% of the fund.
So he's entitled to a view and and I don't think his view is wrong. So with this the restructuring means that anyone can sell at net asset value minus cost. Does that mean that SARS just that's their exit? Um you'll have to ask them. I mean they've said they'll support the vote uh for this. What they do next is entirely up to them.
I mean they they they'll let us know in due course. Um probably because this is an act I would think they can repeat. M uh yeah is there not a risk that you actually get a big chunk of investors who go okay I've been suffering at a discount I can now get out at NAB and then you you're left with a very very small amount of assets under management is that depends what you mean by a risk I mean obviously it's a risk to us as a business but it's not a risk to investors which is what we should be thinking about here isn't I mean in the end what we should be thinking about we've got the you know a duty to actually think about the the investors and I think giving them the opportunity to trade at NAV all of them not just some in a tender offer, but all of them given is the right thing to do.
And if it ends up uh delivering what you've described, which is, you know, an exodus in a smaller fund, well, I'm afraid that's a consequence of doing the right thing. But we're not going to not do the right thing. Well, Terry, thank you very much for talking about Smith.
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