With the investing industry in seemingly unanimous opposition, New York hedge fund Saba capital has set out its counter-claims to the criticisms of its proposed takeover of seven UK investment trusts.
Saba has called for general meetings at the seven investment trusts, in which it is a substantial stakeholder, in order to address deep trading discounts compared to their net asset value (NAV) by replacing the trusts’ management with new appointees (some independent, some connected to Saba).
The current managers of the investment trusts have called the moves “self-interested and misleading”, and have been joined by investment banks and industry bodies in calling for shareholders in the trusts to vote against Saba’s proposals. Former investment trust manager Max King wrote in MoneyWeek that he feels shareholders in the trusts should oppose Saba’s proposals.
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"“A war of independence has broken out in the UK investment trust sector," says Laith Khalaf, head of investment analysis, AJ Bell. "The US activist investor Saba is trying to convince shareholders in seven investment trusts that the boards haven’t done enough to hold investment managers to account and close discounts."
However, the war of words has escalated, with Saba issuing a response on Monday 13 January directly addressing these claims.
The statement preceded a webinar with Saba’s founder and chief investment officer Boaz Weinstein which took place at 1pm on 14 January. During the meeting, Weinstein said that Saba has already made UK investors hundreds of millions of pounds, according to Reuters.
"We bought these funds when people wanted to sell them and have caused the price to go up," Reuters quotes Weinstein as saying.
"In a fiery investor call today, Saba founder Boaz Weinstein hit back at some of the blowback his firm has faced," says Khalaf, "calling into question the behaviour of some of the investment trust boards, claiming they don’t have enough skin in the game.
"He also confirmed the board composition proposed by Saba was temporary, with more independent members to be added in time. Independent boards are often touted as one of the advantages of the investment trust structure, and seen as a key shareholder protection."
Saba’s response to “misleading claims”
Saba’s response consisted in large part of retorts to various of the criticisms levelled against its proposals by the investment trusts. The general claims and responses are outlined below. Note that the responses use Saba's original wording and have not been edited.
Claim:
“Saba’s motives are self-serving and will not benefit all shareholders.”
Saba's response:
- As the largest investor in each Trust, our interests are directly aligned with those of all shareholders.
- We have a proven track record of pursuing changes that return discounted funds to their full NAV and create long-term value for all shareholders.
- If Saba were selected as manager, our strategy of buying undervalued trusts would accrue to the benefit of the very industry (and shareholders) that managers are claiming we would hurt.
Claim:
“Saba wishes to take control of your Company for its own economic benefit rather than due to concerns about the Company's performance.”
Saba's response:
- Saba’s investment and engagement in the U.K. investment trust industry is already driving positive results for shareholders.
- The Trusts’ discounts to NAV have narrowed significantly over the last six months, which we believe is due to Saba’s buying.
- Only after direct pressure from Saba and through growing our holdings have the majority of the Trusts taken shareholder-friendly actions – including offering full cash exits, increased buybacks and tender offers.
Claim:
“Saba has not offered a plan for the benefit of all Shareholders.”
Saba's response:
- As disclosed in our 18 December letter, Saba’s plan is simple: with a reconstituted Board, we intend to provide shareholders with liquidity options plus the opportunity for greater long-term returns under a new investment strategy and manager.
- For HRI shareholders, Saba announced its intent to encourage the new Board to offer a full cash exit at 99% of NAV if shareholders support Saba’s resolutions to reconstitute the HRI Board.
Claim:
“Saba brings uncertainty and risk.”
Saba's response:
- We’re giving shareholders the chance to get out of an underperforming Trust if they so desire. If they want to remain invested, we’re providing shareholders with the opportunity to profit from this sector rather than be a casualty of it.
- If Saba is selected as manager, our plan is to offer a U.K.-listed product that will mainly buy trusts at discounts and encourage management to take action, so investors can profit.
- We intend to use the same proven investment process as the Saba Capital Closed-End Funds ETF (“CEFS”), which invests in discounted U.S. closed-end funds, to the extent shareholders agree. Material changes to the investment policy would require the approval of the relevant Trust’s shareholders.
Claim:
“Saba wants to appoint a non-independent board.”
Saba's response:
- Saba has put forth independent director candidates across the seven Trusts. All nominees other than Paul Kazarian and Boaz Weinstein are independent from Saba, meaning half of the Board of each Trust will be independent if our proposed resolutions are passed.
- To ensure compliance with the highest standards of governance, our nominees intend to add one or more additional independent directors to each Board as soon as reasonably possible following the Trusts’ General Meetings.
Claim:
“The new Board would not meet the standards of both the UK Corporate Governance Code and AIC Code of Corporate Governance.”
Saba's response:
- If Saba’s nominees are elected, the Board of each Trust will be legally compliant at all times under the FCA Listing Rules and will ensure compliance with the highest standards of governance.
- Following the General Meetings, each Board will comply with the AIC Code of Corporate Governance as soon as practicable, as the nominees intend to appoint one or more additional independent directors with suitable experience.
Claim:
“We believe Saba’s plan […] may introduce substantially inflated fees.”
Saba's response:
- This is a fear-mongering tactic being peddled by numerous managers to distract from poor performance.
- Saba’s U.K. investment trust strategy – like its closed-end fund strategy in the U.S. – is anchored in protecting shareholder rights by:
- Pursuing changes that return discounted trusts to their full NAV.
- Creating long-term value for shareholders through low fees and better management.
- Saba maintains a highly competitive 1.1% management fee for CEFS. The fund has experienced substantial demand from investors, allowing it to issue new shares every year since its 2017 launch.
Source: Saba Capital Management. See Saba’s full statement for additional detail, including further disclaimers relating to the claims and responses.
Saba also included responses to specific allegations made by Herald, Baillie Gifford, Janus Henderson and Manulife | CQS.
Does Saba’s response hold up?
JPMorgan Cazenove issued an analysis of Saba’s response to the investment trusts that assessed the validity of Saba’s claims point-by-point (besides those relating to Herald and Henderson Opportunities, on which it is restricted from commenting).
In general, JPMorgan was critical about Saba’s claims, though there were some notable exceptions.
For example, it viewed Saba’s assertion that its involvement in the UK investment trust industry is driving results for shareholders as “a fair claim”.
It agreed with Saba that KPC’s performance has been “poor”, but criticised Saba’s intention to block the cash exit scheme that KPC has already put forward.
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