Seven investment trusts targeted by Saba Capital Management led a widespread and, so far, successful campaign against the hedge fund, accusing it of opportunism and self-interest in attempting to displace their current managers.
On 18 December, Saba wrote to shareholders of the seven investment trusts, in which it is a major shareholder, to call for general meetings and shareholder votes on sweeping changes to their boards and investment managers.
“Underperformance, persistent trading discounts and disengaged management teams leave us no choice but to act,” wrote Saba’s founder and chief investment officer Boaz Weinstein in a letter to the funds’ shareholders.
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Investment trusts can often trade at a discount to net asset value (NAV) because, unlike investment funds or ETFs, their shares are issued in limited quantities. Discounts do, though, often reflect a lack of investor confidence in the trust’s management.
“As major shareholders in seven investment trusts, Saba are calling for general meetings at each investment company to oust the existing boards and overhaul their respective investment managers and mandates,” said Paul Angell, head of investment research at AJ Bell in response to the hedge fund’s proposals.
“From here the newly appointed directors will look to merge the trusts into one mega trust managed by Saba and focus on purchasing further discounted trusts and or merging trusts in an attempt to realise scale benefits.”
The move immediately drew widespread criticism from investment industry insiders, including the Association of Investment Companies (AIC), which wrote to the financial regulator in January to highlight its concerns over the proposals.
Saba was overwhelmingly defeated by the six trusts to vote on its proposals. Following this, on 10 February the hedge fund announced a new approach: it would attempt to convert four investment trusts, only two of which it initially targeted, into open-ended funds.
The background: investment trusts hit back at Saba’s proposals
The boards of the investment trusts themselves were the first to hit back at the hedge fund, accusing it of failing “to provide concrete details” of its plans and attempting to take control of the trusts “for its own economic benefit”.
The investment trusts at which Saba originally requisitioned general meetings are:
- Baillie Gifford US Growth Trust PLC (LON:USA)
- CQS Natural Resources Growth and Income PLC (LON:CYN)
- Edinburgh Worldwide Investment Trust PLC (LON:EWI)
- European Smaller Companies Trust PLC (LON:ESCT)
- Henderson Opportunities Trust PLC (LON:HOT)
- Herald Investment Trust PLC (LON:HRI)
- Keystone Positive Change Investment Trust PLC (LON:KPC)
With exception of EWI, which is on a different timetable to the other six (due to Saba's initial requisition notice being invalid, as its nominee held insufficient shares in the trust), all the meetings have now taken place – and have resulted in heavy defeats for Saba in shareholder votes.
Managers of the investment trusts, including Baillie Gifford which manages USA, EWI and KPC, hit back at the proposals, accusing Saba of opportunism and self-interest.
“Be under no illusion – we believe this US hedge fund manager is acting opportunistically, seeking to seize control of the Board without a controlling shareholding, to pursue its own agenda,” said Karen Brade, chair of KPC.
Before long, fund managers were joined by industry bodies and insiders, particularly the AIC, which launched its ‘My share, my vote’ campaign in January seeking to ensure that all investors were aware and able to vote on matters such as these, even if their shares were held through investment platforms.
“The large platforms have improved shareholder engagement significantly in recent years, and they have acted quickly in response to the Saba proposals,” said Richard Stone, chief executive of the AIC. “But we have to move beyond just relying on firms to do the right thing. We cannot have a situation where investors and their advisers are actively prevented from exercising their voting rights because the law allows their platform or service provider to choose not to pass on those rights.”
The AIC wrote to Jonathan Reynolds MP, secretary of state for Business and Trade, calling for a change to the Companies Act to mandate these changes.
Emma Bird, head of investment trusts research at Winterflood Securities, said “Saba’s commitment to an optimal outcome for all shareholders via its requisitions should be questioned, in our view, and we tend to agree with the Boards’ statements that the proposals do not appear to be in the best interests of shareholders as a whole.
“This is especially true in the case of KPC, where the Board had already put forward proposals for a managed wind-down with an uncapped cash exit at a 1% discount to NAV, with the option to roll over into an equivalent open-ended fund. We agree with the board that this remains in the best interests of shareholders, particularly as Saba’s proposals raise serious corporate governance concerns given the non-independence of the nominated directors.”
What was Saba’s original strategy for the investment trusts?
Saba’s ‘Mind the gap’ campaign argued that the trusts’ performance gaps compared to their benchmarks is unacceptable, and sought to replace their boards with “new, highly qualified director candidates who possess the skillsets and mix of experience necessary to unlock greater value for shareholders”.
Saba also hoped to address what it called “long-term structural issues” that have led to prolonged underperformance under their current leadership.
Saba’s stated objectives were to “provide shareholders with long-overdue liquidity options alongside the opportunity for greater long-term returns”. It hoped that new directors, if appointed, would assess the trusts’ options, including offering liquidity events such as tender offers and share buybacks and refocusing the trusts’ strategies onto “purchasing discounted trusts and/or combining them with other investment trusts, where appropriate, to realize scale benefits and synergies”.
On 13 January, Saba issued a response to what it called “misleading claims” put out by the investment trusts that it is targeting, ahead of a live webinar with its founder and chief investment officer Boaz Weinstein on 14 January.
The response drew attention to Saba’s track record as an investor in UK investment trusts, and areas in which the trusts’ current management has underperformed. In response to claims that its actions were against shareholders’ interests, Saba emphasised its position as a significant shareholder in each of the trusts, saying “it is illogical to suggest that Saba would favour a fire sale that undervalues the very assets in which we are the single largest shareholder”.
How did the investment trusts beat Saba?
Despite this, Saba suffered overwhelming defeats in the first six votes to take place.
Herald became the first investment trust to defeat Saba, on 22 January, with 65% of votes cast against Saba’s proposals. Excluding votes cast by Saba, 99.78% of votes were cast against the hedge fund.
Five more funds followed suit between 3-5 February. At the time of writing, only Edinburgh Worldwide is left to vote, with the general meeting scheduled for 14 February.
In all six votes to have taken place so far, less than 2% of votes cast by shareholders other than Saba were in favour of its proposals.
This was largely due to unprecedented levels of proxy voting on investment platforms – driven largely by the AIC’s campaign and awareness-raising among other industry bodies, as well as moves by the investment platforms themselves to get the vote out.
“There were fears among the investment trust industry that retail investors would not stand up and be counted. However, our customers have debunked those concerns and have shown up in high numbers to cast their votes,” said Kyle Caldwell, funds and investment education editor at Interactive Investor.
“For the six investment trusts that have voted against Saba’s proposals, between 69% and 76% of shares were voted across the interactive investor platform,” he added.
The total vote shares cast in each of the votes that have taken place so far are below:
| Investment trust | Votes cast for Saba's proposals | Votes cast against Saba's proposals |
|---|---|---|
| Herald Investment Trust | 34.9% | 65.1% |
| Baillie Gifford US Growth | 34.4% | 65.6% |
| Keystone Positive Change | 39.5% | 60.5% |
| CQS Natural Resources Growth & Income | 40.9% | 59.1% |
| Henderson Opportunities Trust | 34.4% | 65.6% |
| The European Smaller Companies Trust | 37.9% | 62.1% |
Source: AIC
The next step for Saba
Following defeat in the first six shareholder votes that have taken place, Saba now appears to be changing its strategy regarding the investment trusts.
On 10 February, Saba announced its intention to requisition general meetings at four investment trusts – two of which are among the original seven it targeted, two of which aren’t – aiming to convert them into open-ended funds.
“During our campaign to deliver value to shareholders of UK-listed investment trusts, we received thoughtful feedback from our fellow shareholders that has shaped the request we now plan to put forward,” said Weinstein in the statement.
Unlike investment trusts, open-ended funds cannot trade at below (or above) their NAV.
“We intend to requisition general meetings to give you the chance to vote on a proposal for the trusts to implement a scheme or process that would provide you the opportunity to roll your investment into a better performing open-ended fund with the same strategy and the same manager,” wrote Weinstein.
The four trusts at which general meetings have been requisitioned are:
- CQS Natural Resources Growth & Income PLC
- European Smaller Companies Trust PLC
- Middlefield Canadian Income PCC (LON:MCT)
- Schroder UK Mid Cap Fund PLC (LON:SCP)
In explaining this choice of funds, Weinstein wrote that “while MCT and SCP were not part of our initial campaign, we believe they have traded at wide discounts for too long and that their shareholders would greatly benefit from an open-ended fund structure.
“Of the seven trusts targeted in our initial campaign, we have focused on CYN and ESCT because we believe they are best positioned for an open-ended fund conversion and, unlike HOT and KPC, their boards have not shown an intent to take this action on their own.”
In response, the AIC highlighted that while there is as yet a lack of detail made public about exactly how Saba proposes to convert the investment trusts into open-ended funds with the same management and strategy in place, the recent shareholder votes reflected confidence among shareholders in the structure and approach of the trusts as they are.
Once details are known, though, Stone said that it is “critical for shareholders to examine these proposals and their boards’ responses and vote at any meetings.
“We need to ensure that all shareholders have the opportunity to vote on the future of their trust,” he added.
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