Saba Capital has requisitioned meetings at a further four investment trusts, with the US hedge fund aiming to offer shareholders an open-ended alternative to each of the current vehicles.
The four trusts targeted are CQS Natural Resources Growth & Income (CYN), European Smaller Companies Trust (ESCT), Middlefield Canadian Income (MCT) and Schroder UK Mid Cap fund (SCP).
The activist investor said the new proposals are in response to feedback from shareholders following the first seven requisitioned votes, six of which ended in defeat for Saba, with Edinburgh Worldwide shareholders set to vote on Friday (14 February).
See also: Saba Capital launches campaign to replace seven investment trust boards
In a statement to shareholders of the four trusts, Saba Capital founder and CIO Boaz Weinstein said: “It is apparent that shareholders of CYN, ESCT, MCT and SCP have been trapped in closed-end vehicles trading at deep discounts for years.
“In our view, the necessary solution is to roll or convert these trusts into open-ended funds, which by definition trade at net asset value and are free of the structural issues that plague closed-end funds.”
The founder added that, while shareholders were “not ready to fully replace the boards with new directors”, “it was clear from our conversations that many investors agree with Saba on one crucial point: the importance of the option for liquidity at NAV”.
“In our experience, shareholder action is often the impetus that some boards and managers need to take control of discount problems and deliver liquidity options for shareholders. For example, several of the UK-listed trusts we called for change at have since announced shareholder-friendly initiatives – which we believe would not have occurred had we not directed the industry’s attention to the performance issues at those trusts,” Weinstein said.
“Most recently, Henderson Opportunities Trust PLC (HOT) announced a scheme to allow shareholders to roll their investment into an open-ended fund or to receive their entitlement upon the winding-up of the trust in cash.
“It is encouraging that our campaign has served as a wake-up call for trusts like HOT, but for others – such as CYN and ESCT – there is clearly more work to be done.”
While MCT and SCP were not originally targeted by Saba in their first campaign to overhaul seven investment trusts, Weinstein said they have “traded at wide discounts for too long” and that their shareholders “would greatly benefit from an open-ended fund structure”.
According to Bloomberg data provided by Saba, each of the four trusts have traded at a three-year average discount of between 12.9% and 13.5%.
Saba holds an aggregate interest – including at least a 5% holding in shares in each trust respectively – of 29% in CYN, MCT and ESCT, and 11.3% in SCP.
‘A significant shift in strategy’
Commenting on the open letter, Richard Stone, chief executive of the Association of Investment Companies, pointed out that Saba’s previous proposals had been “decisively rejected” among six investment trusts. “This demonstrates shareholders value the investment trust structure which has delivered strong long-term performance and the independent oversight of boards,” he said.
“We have not yet seen the requisition notices that Saba has said it intends to deliver to these four investment trusts or the detailed proposals. It is therefore unclear how they intend to provide any conversion or rollover into an open-ended vehicle with the same manager and strategy.
“This marks a significant shift in strategy by Saba. They now appear to recognise the proposals already put forward by the boards of two other trusts they had previously targeted – Henderson Opportunities Trust and Keystone Positive Change.”
Stone added it is “critical” for shareholders to examine the proposals put forward, as well as any responses from the trusts’ boards at meetings.
“We need to ensure that all shareholders have the opportunity to vote on the future of their trust. That’s why we have recently launched our ‘My share, my vote’ campaign to change the Companies Act so that nominees, including platforms, must pass on voting rights and information to their customers.
“Investment trusts are a UK success story. Over the last 10 years investment trusts have outperformed open-ended funds in 11 out of 15 sectors. The closed-ended investment trust structure works well for investing in smaller or less liquid companies. Governed by independent boards acting in the interests of all shareholders, the closed-end structure has a number of significant advantages.
“These include the ability to be fully invested, to invest in less liquid assets, to borrow and to smooth income. These all can deliver superior performance relative to open-ended funds and consistent and rising income over long periods.”