After months of curiosity around its intentions for the investment trust sector, activist investor Saba Capital has launched a campaign to replace seven investment trust boards.
The US hedge fund has requisitioned the boards of Baillie Gifford US Growth Trust, CQS Natural Resources Growth & Income, Edinburgh Worldwide Investment Trust, European Smaller Companies Trust, Henderson Opportunities Trust, Herald Investment Trust and Keystone Positive Change Investment Trust.
Saba, which owns 19-29% shares in each trust, is seeking to replace the boards of each trust. The activist investor said that it believes new boards are necessary to narrow discounts and correct underperformance.
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Boaz Weinstein, founder & CIO of Saba Capital, said in an open letter to shareholders: “Performance demonstrates that they have not taken sufficient steps to resolve the trusts’ structural issues, depriving shareholders of superior returns. While there are multiple levers to narrow these persistent discounts, inaction has been the consistent course of current leadership.”
At each meeting, which Saba said would be scheduled by early February, shareholders of the trusts will vote on removing all current directors of each trust and replacing them with new candidates.
If appointed, Weinstein said the new directors would assess all options available to the trusts, including terminating the trusts’ current investment management agreements and potential combinations with other investment trusts.
Reaction
Saba has been building its positions in investment trusts over the last two years and, after a long wait, it has finally publicly declared its intentions.
Matthew Read, senior analyst at QuotedData, said that clarity on Saba’s interests in the sector was welcome.
“Reading this morning’s statement, we see an obvious flaw in their 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.”
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He added that the call for substantial liquidity also ignores the unquoted positions held by trusts such as Baillie Gifford US Growth and Edinburgh Worldwide, while Read questions the logic behind targeting Keystone Positive Change, which is considering folding into its open-ended sister fund.
“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,” Read added.
“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.
“It seems to us that their approach is very short-term in nature and this highlights a long running issue that, because many retail investors hold their shareholdings through platforms and do not tend to vote, that large professional investors get a disproportionate amount of the vote.
“This can lead to outcomes that are not in the interests of all shareholders and so we think that it is all the more important that shareholders in these funds make sure their interests are being protected and that they make sure they get out and vote.”
