US activist investor targeting cheap investment trusts

Wide discounts to net asset value (NAV) on UK-listed investment trusts are attracting interest from overseas investors keen to make money if discounts close.

One is US activist investor Boaz Weinstein, who runs Saba Capital, a $10 billion New York-based hedge fund.

Citywire, a specialist financial publication, reports that Saba has so far bought into equity trusts including BlackRock Smaller Companies, Schroder UK Mid Cap, JPMorgan European Discovery , and it is the biggest institutional holder of Henderson Opportunities, with a 7.1% stake.

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Saba has also recently upped its position in European Opportunities Trust , owning more than 5% of the trust, and owns stakes in Baillie Gifford’s Edinburgh Worldwide, US Growth and Keystone Positive Change.

Weinstein could begin to deploy an “activist” approach, where he pressures the board of the trust to close the discount, such as by buying back their own shares. If he is able to force the discontinuation of a trust, then it would be wound up at NAV.  

He could also deploy “arbitrage” trades, according to Citywire, where he buys shares in a trust and shorts the stocks (to make money if they fall) in the portfolio in order to profit if a trust’s share price and the shares of its portfolio companies move in different directions.

His investment firm in October issued a letter to the chair of European Opportunities Trust outlining its opposition to a recommendation that shareholders vote in favour of the conditional tender and a continuation resolution at its Annual General Meeting on 15 November.

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In the letter, Weinstein said it was a “fund of liquid holdings imminently capable of providing liquidity to its shareholders”, and therefore “there is no reason to keep investors in this fund trapped for the benefit of the manager”.

Broker Winterflood notes that Weinstein is pushing for a full exit of the fund at NAV, rather than the 25% redemption opportunity set out in the conditional tender.

Saba has had run-ins with BlackRock in America this year over discounts on closed-ended funds listed in New York. In June, Saba filed a lawsuit against 16 closed-ended funds, alleging that the boards are stripping voting rights from ordinary shareholders.

The Association of Investment Companies (AIC) calculates that the average investment trust discount is now at 16.9%, the widest discount for a month-end since December 2008 when the world was in the depths of the global financial crisis.

The AIC says: “The average discount started to widen at the beginning of 2022, when inflation and interest rates began to climb and war broke out in Ukraine. By the end of 2022, it had hit 12.5%.”

It adds: “Average industry discounts have to be interpreted with caution, as some underlying assets of investment companies are valued less frequently. This means that the discount for the end of October is likely to be revised in future, as new valuations become available.”

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Wide discounts are attracting takeover activity and consolidation in the sector.

Abrdn is combining abrdn New Dawn and Asia Dragon, while CT Property accepted an offer in the spring from LondonMetric Property (LSE:LMP), and Industrials REIT has been bought by private equity group BlackStone.

Ewan Lovett-Turner, head of investment trust research at Numis, says if discounts persist, private buyers will seek to take advantage of attractive values for high-quality assets.

He expects the pick-up in takeover activity to continue, particularly in investment trusts that buy illiquid assets, such as property and infrastructure.

We reported that eight trusts could be takeover targets, including private equity and renewable energy infrastructure portfolios.