Seven investment trusts targeted by Saba Capital Management have issued scathing responses to the New York-based hedge fund and activist investor’s proposals to overhaul their management boards.
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.
“In short, 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.
“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.”
Investment trusts hit back at Saba
However, the trusts’ current leaders have 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 for which Saba has called 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)
All have issued circulars urging shareholders to vote against Saba’s proposals, with the exception of Edinburgh Worldwide 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).
Baillie Gifford, which manages three of the trusts (USA, EWI and KPC), has called on shareholders to “protect their investment” by voting down Saba’s proposals.
“Every vote matters,” said James Budden, head of global marketing at Baillie Gifford. “We urge all shareholders to act on this occasion, to clearly understand the choices facing them, and to ensure their voices are heard.”
KPC’s board accused Saba of opportunism and said that it is “appalled by Saba’s actions and conduct”.
“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.
Brade highlighted the steps that KPC has taken to engage constructively with shareholders, “in absolute contrast to Saba”, and formulate a credible exit plan for investors.
“Saba cherry-picked data when our style of investing was out of favour to portray a narrative of poor performance and wide discounts” said Budden. “We recognise the past few years have been tough for the companies we invest in; however, performance has notably improved throughout 2024. Baillie Gifford US Growth Trust returned 56% and Edinburgh Worldwide returned 24% in share price terms.”
CQS Natural Resources, meanwhile, called Saba’s proposals “self-interested and misleading”.
What is Saba’s strategy for the investment trusts?
Saba’s ‘Mind the gap’ campaign argues that the trusts’ performance gaps compared to their benchmarks is unacceptable and seeks 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 hopes to address what it calls “long-term structural issues” that have led to prolonged underperformance under their current leadership.
Saba’s stated objectives are to “provide shareholders with long-overdue liquidity options alongside the opportunity for greater long-term returns”. It suggests that new directors, if appointed, will 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”.
Unsurprisingly, the plan has drawn criticism from the investment trust managers.
“Saba’s plan lacks transparency, would flagrantly disregard good governance, and may introduce substantially inflated fees,” said Brade.
However, opposition is not limited to the managers of the trusts.
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 does it mean for investors?
Shareholders of any of the trusts will be able to vote on the proposals at or before general meetings taking place in the coming weeks. Shareholders should check the time and locations of the votes: the earliest is Herald's on 22 January, though Edinburgh Worldwide's is yet to be scheduled. Proxy votes will often have voting deadlines that come before the date of the meeting, and while some shareholders will be able to vote via investment platforms, these deadlines could be earlier still.
Some of the funds have already communicated liquidity offers to shareholders. KPC, for example, published a proposal for the reconstruction and voluntary winding up of the company in December. Henderson Opportunities Trust has offered shareholders the choice of the choice of a full cash exit at net asset value or the option of a rollover into an open-ended fund managed by Janus Henderson.
Saba has proposed tearing up many of these schemes, though, so shareholders wishing to exercise them will need to do so before the votes take place.
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