The normally sleepy world of investment trusts received a wake-up call just before Christmas with the publication (18 December 2024) of a shareholder letter by activist investor Saba Capital Management calling for change at no fewer than seven well-known funds.

Set up by hedge fund manager Boaz Weinstein, Saba has a history of successfully instigating change, and while critics argue its proposals are self-serving, the campaign could be the kick the sector needs to accelerate corporate action, which Stifel says ‘still seems subdued considering the extent of discounts’.

While 2024 saw strength for markets in general as they continued to be driven by technology stocks, the investment trust sector continued to struggle and the average discount only showed a brief glimpse of improvement during the summer, but mostly languished around the 15% to 16% level. There has already been a wave of exits from the trust universe thanks to mergers and investment companies being wound up.

WHAT DOES SABA WANT?

Saba has called general meetings at each of the trusts, where it is a major investor, because in its view the current boards have ‘failed to hold the investment managers accountable for the wide trading discounts to NAV (net asset value) and their inability to deliver sufficient shareholder returns’.

‘What caught my attention for the past three years is the UK trust industry’s discounts have deepened as a consequence of investors losing faith in managers after shockingly poor performance in certain trusts,’ says founder and manager Boaz Weinstein. ‘At the same time, the boards have not held those managers accountable,’ adds the manager.

While Saba prefers to engage privately with boards, ‘underperformance, persistent trading discounts and disengaged management teams leave us no choice but to act’, says the firm.

The resolutions will be ordinary resolutions, which require 50% of votes cast to pass. Clearly Saba will be voting in favour of the proposals, and given participation from retail investors is typically low, Saba will likely represent a significant proportion of the turnout. Therefore, the participation of other shareholders is key to the outcome of the respective votes.

‘The proposals from Saba would fundamentally change these investment trusts,’ says Richard Stone, chief executive of industry body the AIC (Association of Investment Companies).

‘Initially Saba is proposing to replace the current independent boards with just two new directors. Saba has stated an intention to follow this with a replacement of the investment manager and a completely new investment mandate. This would likely change the asset exposure, investment risk and return profile of the companies, moving them away from the original choice made by investors.’

Stone continues: ‘Investors need to understand the details of what is being proposed by Saba, including changes to the trusts’ boards, strategy, manager or fees. They need to consider whether the investment trust would still meet their needs, as well as any potential tax implications.’ 

CHALLENGING PERFORMANCE

When it sent its letter on 18 December, Saba declared stakes ranging from just under 19% to over 29% in seven well-known trusts, making it the largest investor in each, namely: Baillie Gifford US Growth (USA), CQS Natural Resources Growth & Income (CYN), Edinburgh Worldwide (EWI), European Smaller Companies (ESCT), Henderson Opportunities (HOT), Herald (HRI) and Keystone Positive Change (KPC).

In its latter, Saba argued the boards of these trusts ‘have not minded the trading gap’, which is why it wants to offer their shareholders ‘the opportunity to elect new directors with a concrete plan to deliver shareholder value.’

Over the three years to 13 December 2024, the total shareholder return compared with their respective benchmarks has ranged from -52.8% at Baillie Gifford US Growth to +11% at European Smaller Companies, leading Saba to claim the trusts’ managers and directors ‘have failed shareholders’.

The firm has requisitioned general meetings for each of the seven trusts to be scheduled at the latest by early February 2025, giving shareholders the chance to vote on two resolutions – removing the current directors, and appointing new directors of Saba’s choice.

The letter indicated that if the proposals pass, the reconstituted boards will assess options for delivering value to shareholders including Saba being proposed as the new investment manager of each of the trusts, with a potential change in mandate to invest in discounted trusts, as well as shareholders being offered a liquidity event near NAV, for those not wishing to remain invested if the manager/mandate were to change.

While typically low, the turnout of retail investors who make up meaningful portions of the registers will be key to the results at the general meetings.

‘By fully reconstituting the trusts’ boards, we believe we can unlock greater value for shareholders and address the long-term structural issues that have hamstrung the Trusts’ return potential under current leadership. Each of the director candidates shares a deep commitment to improving shareholder returns and putting your interests above their own,’ says Weinstein.

If its directors are appointed, they would have a range of options including tender offers and share buybacks, replacing the existing managers and even changing the trusts’ investment mandate or consolidating them with other trusts to realise scale benefits and synergies.

Shares notes that since the publication of its letter Saba has increased its stakes in six of the seven trusts, in some cases to a material extent.

SETTING OUT THEIR DEFENCES

The performance of most of the requisitioned trusts has been challenging in recent years, which had contributed to discounts widening prior to Saba’s appearance on registers.

However, several of the requisitioned companies are now trading at, or close to NAV, albeit with Saba’s stake-building boosting ratings, and several have introduced measures to tackle discounts.

One example is Keystone Positive Change, which has proposed to roll the fund over into its open-ended equivalent, whilst the performance of SpaceX has lifted sentiment towards Edinburgh Worldwide and Baillie Gifford US Growth.

Herald’s board has recommended shareholders vote against all of Saba’s proposed resolutions. Setting out its defence, the crux of Herald’s argument is that Saba “is attempting to take control of your company for its own economic benefit and change the company’s investment strategy, potentially destroying value”.

The board highlights that Herald has a strong long-term track record, whilst it was unable to find a verifiable source for Saba’s own track record, and also notes the independent board and a positive outlook for the strategy, as well as features such as the buyback policy and a three yearly continuation vote, with the next due in April 2025.

Chaired by Andrew Joy, Herald’s board pointed out that since its inception in April 2009, Saba has ‘materially underperformed’ Herald’s NAV total return of over 865%.

The board also slammed Saba’s ‘opportunistic proposal’ to take control of the company ‘for its own economic benefit rather than due to concerns about the company’s performance or share rating’.

Saba subsequently countered Herald’s statements about performance, giving the NAV total returns of the Saba Closed-End Funds ETF (CEFS US) compared to Herald and further questioning Herald performance.

The US activist has since announced its intension to offer Herald shareholders a 100% cash exit at 99% of NAV if its efforts to reconstitute the board are successful. 

‘COMPLETELY NONESENSICAL’ TO CEDE CONTROL

In the case of Edinburgh Worldwide, Quoteddata’s Matthew Read says it would be ‘completely nonsensical’ for shareholders to cede control to one dominant shareholder who can then act entirely in its own interests, ‘particularly when that shareholder’s proposals look very short term in nature and said shareholder is also proposing to install itself as the trust’s manager – managers controlling boards being a huge corporate governance No No, in fact we generally advocate that companies should have no representatives of the manager on their boards.’

CQS Natural Resources Growth & Income has published its circular in relation to the requisition, urging shareholders to vote against, highlighting similar issues to that have been raised by other boards.

It considers Saba’s proposals “self-interested and misleading” and highlights the ‘lack of detail, governance concerns and discounts on Saba’s current funds it has taken over.’

CQS’s chair Christopher Casey says Saba’s proposals are ‘without merit, introduce new and significant risk to your investment and are not in the best interests of all Shareholders. Their claims of the company’s underperformance are misleading, their proposals demonstrate a self-interested short-term focus, their track record is questionable and, if the requisitioned resolutions are passed, you may no longer be invested in a highly specialised natural resources investment trust with good governance and a clear strategy.’

Quoteddata’s James Carthew says: ‘Saba’s cherry-picking of statistics to suit its narrative, vague promises and cynical attempt to force its agenda on ordinary shareholders must be rejected.’

CQS Natural Resources has demonstrated in the past that its share price can double or even triple when sentiment turns in favour of its remit, says Carthew, so why would investors want to cash in the portfolio at this point in the cycle and miss out on that potential?

‘We think that it would be completely nonsensical for shareholders of all of the trusts requisitioned by Saba – including CYN – to hand control to one dominant shareholder who can then act entirely in their own interests – we continue to urge all shareholders to get out and vote against this to protect their investment.’

At the point of writing, Saba owned 26.1% of Baillie Gifford US Growth Trust, 21.1% of Edinburgh Worldwide Investment Trust and 29.7% of Baillie Gifford Keystone Positive Change Investment Trust.

The boards of Baillie Gifford US Growth and Keystone Positive issued circulars on 6 January strongly advising shareholders vote against all of Saba’s requisitioned resolutions, while Edinburgh Worldwide reiterated its conviction in the trust’s vision and strategy saying it will urge all shareholders to vote against the resolutions and will convene a general meeting in due course.

‘APPALLED’ BY SABA’S ACTIONS

Keystone Positive Change’s chair Karen Brade said she was ‘appalled’ by Saba Capital’s actions and conduct and warned that the US hedge fund is ‘acting opportunistically, seeking to seize control of the board without a controlling shareholding, to pursue its own agenda’.

‘We believe Saba’s plan lacks transparency, would flagrantly disregard good governance, and may introduce substantially inflated fees. The proposed resolutions are not in the best interest of all shareholders and create significant uncertainty.’

Brade told Shares in person: ‘Fees will likely go up by a lot, because Saba tends to charge a lot more, and they are talking about a strategy that is vastly different to what my shareholders have at the moment. That is a global strategy with a sustainable overlay, which is very difficult to get elsewhere.’

The chair also made the point Saba is not offering certainty of cash. ‘I’m giving cash now, it’s going to be in February, and if people roll into the sister fund it will be 56 basis points. I said to Saba, “this is appalling behaviour, I have incurred significant cost for my shareholders to put this scheme in place, which has been very well received, and you are going to block it, it is outrageous”’.

Matthew Read, senior analyst at Quoteddata adds: ‘We don’t see how it [Saba] can really accuse KPC’s board of inaction given the steps that it has taken.’

Finally, European Smaller Companies and Henderson Opportunities, both of which are managed by Janus Henderson, have published their circulars outlining why shareholders should vote against Saba’s resolutions.

At European Smaller Companies, where Saba owns 29.35% of the voting rights at the time of writing, the US activist is proposing not just to take control of the board – and therefore the company – but to take over the role of investment manager and change strategy.

The board warns investors Saba is counting on a high proportion of shareholders not voting so their participation is key.

‘The bottom line is that you chose to invest in ESCT. It has been a top performing fund in the London listed European small cap sector. Please don’t let Saba take that choice away from you,’ it adds.

At Henderson Opportunities, where Saba owns 28.4% of the capital and wants to remove all four current independent directors, the board had already been working on a ‘scheme of reconstruction’ to correct the longer-term NAV and share price performance including offering investors a full cash exit at NAV and/or the option of rolling their shares over into Janus Henderson UK Equity Income & Growth (7494221).

The board believes Saba wants to take control of the company, sack the managers and pursue its own investment strategy ‘which would likely be fundamentally different to the existing strategy and have a much higher risk profile’.

The board also warns if appointed as investment manager, Saba may seek to charge ‘significant hedge fund fees’ and there may be no shareholder vote on the terms of its appointment as the new manager or the level of fees payable.

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HOW YOU CAN HAVE YOUR SAY

Shareholder in the trusts where general meetings have been requisitioned can find the company’s circular advising them how to vote on either the Shares or the London Stock Exchange website.

Investors who own shares directly and are listed on a trust’s main register will receive the circular by post, along with a Form of Proxy which should be filled in with your voting intentions and sent back to the company regardless whether or not you aim to attend the general meeting.

For most small investors, who own their shares via a platform such as AJ Bell (AJB), the voting process is straightforward.

On the AJ Bell website, log into your account, click on the drop-down menu in the box titled ‘Account Menu’ and select ‘Voting Instructions’, which will bring up a new page listing your investment, a description of the event (in this case general meeting), the last date by which you need to send your instructions (usually a week or so before the event) and a button saying ‘Give Instruction’.

Clicking on this button takes you to the ProxyVote website, where you can view the meeting agenda, ‘learn before you vote’, or request to attend the meeting in person.

If you want to attend in person, you simply fill in your details online and submit the form and an attendance card will be sent to your registered address.

If you own more than one of the trusts in question, attending the general meetings in person may not be possible in which case you should review the resolutions which are laid out on the page.

For each resolution, you will be asked to vote your shares For or Against, or you can decide to Abstain, although that would rather seem to defeat the object, and, as the AIC has warned, not voting could make a big difference to your investment.

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SELECTIVE VIEW OF PERFORMANCE

Paul Angell, head of investment research at AJ Bell, said Saba has centred its case for intervention around the poor performance of the seven trusts, as well as their respective board’s inability to control discounts.

‘When it comes to the former, Saba have been somewhat selective in highlighting three-year relative returns, with most of the trusts performing better on a longer-term basis,’ noted Angell.

‘At the upcoming meetings, investors will need to think hard about whether they want to jettison the existing management teams and their investment process in favour of an activist strategy run by Saba. Any votes in favour will need to be clear-eyed to the upcoming overhaul and departure from the existing investment rationale within the trusts.

‘Saba have also offered to provide tender offers on the trusts, should their new directors be appointed. Given the relative symmetry between share prices and NAVs, these offers will be of limited additional use for investors wanting to exit close to NAV, although they will provide a useful exit opportunity for those who don’t want to remain invested under Saba’s activist investment strategy in the instance that their ambitions are realised.’

Quoteddata’s Read observed that despite various boards and managers attempting to engage with it, ‘all of those that we have spoken to have said that Saba was not interested in talking to them’.

He also sees an obvious flaw in Saba’s strategy. ‘Saba wants shareholders to replace the current boards and deliver on its plan to “quickly deliver substantial liquidity and long-term returns for all shareholders”.

‘However, those two are often mutually incompatible, particularly for some of the funds it is targeting where the underlying holdings are less liquid – Herald being the obvious example as it is a big fund with a huge tail of small illiquid positions that trade by appointment that could take years to sell off and you would likely move the market against you in many of these, particularly once the market spots you as a forced seller.’

Read continued: ‘The call for substantial liquidity also ignores the unquoted positions held by trusts such as EWI and USA. These are long-term investments and, for some, the pay outs can be big as has recently been illustrated by the spectacular success of SpaceX. This and the other challenges we highlighted above have long made us feel that Saba doesn’t really understand some of the funds that it is invested in.

‘It is well-documented that Saba has been successful with similar attacks in the US but the UK closed end fund market is fundamentally different. Standards of corporate governance are higher, and returns have generally been better, so this sort of approach makes less sense, particularly now that progress has been made on addressing problems such as the cost-disclosure issues and so discounts are now retrenching.’

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INVESTEC SLAMS SABA’S ‘EGREGIOUS AND OPPORTUNIST ATTACK’

The independent broker is ‘deeply concerned’ about the activist’s proposals on many levels

Investec says it is time shareholders in the seven targeted trusts ‘man the barricades’ against Saba’s ‘egregious and opportunistic attack’ and strongly recommends they vote against its resolutions. Nevertheless, the broker concedes this is a time for industry self-reflection, since the US activist’s actions send a clear message that more needs to be done to narrow discounts and control discount volatility.

CLASSIC ACTIVIST TACTIC

In a note published on 10 January, Investec, which isn’t a broker to any of the seven targeted trusts and is therefore deemed independent, slammed the fact Saba’s campaign was launched over Christmas. Investec explained this is a classic activist tactic designed to reduce the length of time these investment trusts can engage with shareholders and mount an effective defence. ‘We see this as “greenmail”, pure and simple’, thundered analysts Alan Brierley and Ben Newell.

In their opinion, the campaign is all about Saba looking to opportunistically take advantage of a UK investment trust industry enduring a perfect storm after an extended and exceptionally strong period, and seeking to grow its own assets under management. Investec warned it is ‘deeply concerned’ about Saba’s proposals on many levels.

‘While the devil is supposed to be in the detail, the latter is conspicuous by its absence. Just how are shareholders expected to make an informed decision with Saba failing to provide even basic information on key fundamental issues including their own track record, future portfolio exposure, fee arrangements, liquidity options and discount control mechanisms,’ said the broker. ‘The paucity of information suggests strongly to us that Saba is relying on investor inertia, rather than the strength of its own arguments, for the resolutions to succeed.’

AN INCONVENIENT TRUTH

Investec also called out an ‘inconvenient truth’ for Saba in the performance of its own funds. Since launch in 2017, the total return from Saba’s flagship Closed End Fund ETF is 124% versus a benchmark total return of 191.1%, noted Investec, with the fund having underperformed in seven out of eight years. Brierley and Newell also highlighted that Saba’s two US closed end funds are trading on discounts of 8.3% and 10.5% respectively.

‘We also highlight that the management fee of the ETF is 1.1% of NAV, while the Total Annual Expenses is an eye-watering 5.8%, which reflects the fund-of-funds approach and includes interest expenses.’ In a scathing summary, Investec said Saba’s proposals suggest ‘a distinct lack of understanding, bordering on contempt, of the AIC Corporate Governance Code which provides a framework of best practice, or of the expectations of current shareholders based on a corporate governance model that has evolved over the long-term. The potential conflicts of interest are material and crystal clear.’

DISCLAIMER: AJ Bell, referenced in this article, owns Shares magazine. The author (Martin Gamble) and editor (Tom Sieber) own shares in AJ Bell.

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