Having achieved some notable successes in the US closed-ended sector, US hedge fund Saba Capital is now turning its attention towards UK investment trusts over the last 12 months. It has built up holdings in around 10-15 trusts, including high-profile names such as BlackRock Smaller Companies, Polar Capital Technology, Schroder UK Mid-Cap, Keystone and Baillie Gifford’s Edinburgh Worldwide. Its recent actions on the European Opportunities Trust give some clues as to what investment trust boards can expect in the months ahead.
Having taken a significant stake, Saba had pushed the board of the European Opportunities trust to offer a full liquidity option at NAV to shareholders at its recent continuation vote. It didn’t get the support it needed, and pressed for a 50% tender offer instead. The board got through the continuation vote by offering a 25% tender offer, which Saba has used to double its shareholding to 10%.
It has not yet publicly declared its intentions in the other trusts, though it appears work may have been going on behind the scenes. Apparently in response to Saba upping its position to 10%, Keystone Positive Change announced plans to buy back shares and set a 2027 continuation vote.
It is disrupting an industry left vulnerable by a series of difficult circumstances. Until recently, discounts on investment trusts were sitting at almost twice their average level, according to the Association of Investment Companies. Part of this has been their own making. As Ben Conway, head of fund management at Hawksmoor, points out: “We get these sorts of investors because we have free markets and that is generally positive. They bring discipline to boards and trusts. These investors couldn’t do what they do if the opportunity didn’t exist. If boards don’t want them on the register, they need to ensure they don’t create the conditions for problems to emerge.”
However, he also admits that the problems aren’t always in the board’s control: “There are problems with the current regulatory and legislative framework, particularly with the rules around cost disclosure.” These rules have seen many wealth managers exit the sector, particularly in areas such as renewable energy, private equity and infrastructure, putting pressure on share prices and widening discounts.
Equally, he says, shareholders are often not active enough to counter this type of arbitrage activity: “Activism takes time and resources. Retail investors are disenfranchised. When it comes to voting, change only needs to happen with 50% of the votes cast and many people don’t vote.” For retail investors, he says, it’s not apathy, but the difficulty of voting. “They have to go to the AGM, get a certificate from their platform. They have to be with a platform that offers it. The act of voting is really difficult.”
Saba Capital is unusual in that it is not targeting the weakest trusts. Instead, it has largely targeted trusts that have had a difficult run of recent performance as interest rate rises have hurt their investment style, but are not ‘problem’ trusts. Manager Boaz Weinstein said in a recent interview with Simplify Asset Management: “I’m interested in funds trading on a discount that have nothing broken about them. That discount could be closed if the manager snapped their fingers and made the closed-ended fund into an open-ended fund.”
Weinstein’s approach is to take pure exposure to the narrowing of the discount. That means taking short positions on the underlying holdings, while taking long positions in the trusts. “With all my closed-ended funds. I’m trying to fully hedge the underlying and make it just about the discount,” he said.
This is why Saba hasn’t targeted the areas with the widest discounts, such as renewable energy infrastructure or commercial property. For these, it is difficult to hedge the underlying assets. Equally, the trust can’t be readily liquidated if Saba forces a wind-up. It could take years to wind up a solar farm portfolio, for example. Nick Greenwood, manager of the MIGO Opportunities trust, says: “Saba is not targeting niche funds such as Georgia Capital. Small caps are at a massive discount to the FTSE 100. It may be making a call on that. However, it may find they are more illiquid than it thinks. They certainly do not trade like the Russell 2000.”
Saba Capital will also need to take a view on the shareholder base and whether it is likely to be able to persuade them to back its actions. “Many shareholders will be in there for a reason. They are buying it to do a job in a portfolio and don’t want to sell,” says Greenwood. This is almost certainly why he hasn’t targeted large trusts such as the F&C investment trust. The underlying holdings may be more liquid, but the process of realising value may be more difficult.
Saba has shown itself to be flexible in the measures it takes to narrow the discount. That may be forcing the board to offer a tender offer, as in the case of European Opportunities trust, or pushing for buybacks to narrow the discount. However, in the US, the group has been prepared to go considerably further in pursuit of its aims, which may be a sign of things to come for the UK investment trust industry.
For example, it recently scored a legal victory, when a New York court sided with the firm in a case against BlackRock over voting rights. Under the Maryland Control Share Act, firms can choose to limit the voting rights of large investor groups to protect the interests of small shareholders. Saba argued that the law stripped shareholders of their voting rights. The court agreed. Weinstein said in a press release: ‘We are pleased to have brought this lawsuit for the benefit of all investors in closed-end funds managed by BlackRock to put an end to the practice of robbing shareholders of their right to vote all of their shares.’
Saba has brought – and won – two previous law suits in the US, against fund managers Eaton Vance and Nuveen. It has also forced funds to convert to open-ended funds. It may also push for mergers. It is noteworthy that Abrdn Smaller Companies Income trust was on its list of holdings earlier in the year, and announced plans to merge with its stablemate, Shires Income, in July.
The hedge fund promises to disrupt the investment trust industry at a vulnerable moment. Whether it can succeed, and whether it will be good for shareholders, is an ongoing question.
