By Samir Shah, senior research analyst at JM Finn
The UK investment company sector has long been proud of its independence, long-termism and specialist access.
But it has also had a nagging problem: too many companies have traded on persistent discounts to net asset value, with boards often asking shareholders for patience rather than offering decisive action. That has created the perfect opening for a new breed of activist investor.
At the centre of this shift is Saba Capital. Its arrival in the UK has been one of the most disruptive developments the sector has seen in years. Activism itself is not new: investors have often bought discounted companies and pushed for buybacks, tender offers or wind-ups to unlock value. Done well, that can be healthy. It reminds boards that discounts are not just an unfortunate market condition; they are a signal that shareholders may want something to change.
What makes the latest wave different is the level of aggression. Saba has not simply asked boards to do more buybacks or improve communication. It has sought to replace directors, reshape boards, challenge mandates and, in some cases, position itself to influence who manages the assets.
See also: Baillie Gifford US growth hits back at Saba Capital
Investment companies are unusual structures. Shareholders elect boards, and boards appoint managers. If an activist gains control of the board, it can potentially influence the manager, the fee structure and even the future investment strategy. For investors who bought a trust for a specific exposure such as technology or smaller companies, that is not a minor governance detail. It could change the nature of what they own.
Saba’s campaigns have therefore exposed a tension at the heart of the sector. On one hand, activists are applying pressure where it was overdue. On the other, the methods being used raise questions about whether all shareholders are being protected equally.
The uncomfortable truth for boards is that activists have found fertile ground because discounts have been wide. Higher interest rates, weak demand for UK-listed assets, cost-disclosure issues and a lack of natural buyers have all weighed on the sector. But shareholders are increasingly impatient with explanations alone. They want action.
The uncomfortable truth is that activists have found fertile ground because discounts have been wide.
To their credit, many boards have responded. Across the sector, we are seeing more corporate activity, larger and more regular buybacks, tender offers, continuation votes, mergers and, in some cases, managed wind-downs. Fee pressure has also intensified. Companies that once relied on the strength of their long-term record are now being pushed to prove that their charges remain competitive and that their structure still serves shareholders well.
That is a positive development. A trust trading on a stubbornly wide discount cannot simply hope the market will eventually notice its merits. Boards need credible discount-control policies, clear capital allocation discipline and a willingness to return money when the market is telling them the trust is too small, too illiquid or no longer differentiated enough.
See also: ‘Our patience is not inexhaustible’: Gore Street survives Saba requisition
The other big lesson is communication. Many companies have large retail shareholder bases, often held through investment platforms. Historically, those shareholders have not always voted.
Sometimes they are not aware a vote is taking place; sometimes platform processes make participation harder than it should be. Activists understand this. Low turnout can magnify the influence of a determined shareholder with a sizeable stake. Boards are now learning that shareholder engagement cannot begin only when an activist appears on the register.
The Financial Conduct Authority is now reviewing rules for closed-ended funds, with a particular focus on conflicts of interest, board independence and the role of substantial shareholders. Proposed changes could make it harder for an activist shareholder to replace a board and then benefit from becoming the manager without additional safeguards.
Such changes would not end activism, nor should they. Shareholder pressure can be an important force for better governance, narrower discounts and improved capital discipline. But future rules may limit the ability of activists to use voting power to secure influence that looks and feels like control, without going through the usual takeover protections.
Boards are now learning that shareholder engagement cannot begin only when an activist appears on the register.
