US activist looks to oust boards at seven investment trusts

US activist investor Saba Capital has called for the removal of board members at seven investment trusts in which it is the largest shareholder, owning stakes between 19% and 29%.

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Boaz Weinstein (pictured above), who runs Saba Capital and oversees $5.5 billion in assets at the New York-based hedge fund, has been building up stakes in a number of investment trusts on the back of the industry’s wide discounts, which is the percentage gap between the share price and the value of its underlying investments – the net asset value (NAV).

The discount of the average investment trust, excluding 3i Group Ord (LSE:III), was 13.7% at the beginning of the year, increasing to 15.2% by 12 December 2024.

As we reported a year ago, it was anticipated that Weinstein might begin to deploy an “activist” approach, where he pressures the board of the trust to close the discount, such as through buying back their own shares or launching tender offers. In the event that an investment trust is discontinued, it would be wound up at NAV.  

Weinstein’s intentions have today become clearer with the publication of an open letter announcing a campaign to deliver value to shareholders of seven investment trusts: Baillie Gifford US Growth Ord (LSE:USA), CQS Natural Resources Growth & Income (LSE:CYN), Edinburgh Worldwide (LSE:EWI), The European Smaller Companies Trust PLC (LSE:ESCT), Henderson Opportunities (LSE:HOT), Herald (LSE:HRI) and Keystone Positive Change (LSE:KPC).

Saba Capital has called for general meetings to take place for each trust by early February, and has proposed replacing the entire board of each trust. The hedge fund has also named some of the new directors it wants in place.

The Companies Act 2006 says the required percentage of share capital that must be held by a group of shareholders to be able to requisition a general meeting is 10%. Therefore, given Saba Capital’s stake is above that threshold, the meetings will have to go ahead.

Saba Capital said: “We called these general meetings because the current boards have failed to hold the investment managers accountable for the trusts’ wide trading discounts to net asset value (NAV) and their inability to deliver sufficient shareholder returns.

“Saba holds an interest in approximately 19% to 29% of each trust’s shares, making us the largest investor in each trust, aligning our interests with yours and giving us the right to requisition the general meetings. We believe that the boards have not minded the trading gap, which is why we want to offer you the opportunity to elect new directors with a concrete plan to deliver shareholder value.”

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According to Saba Capital, lacklustre performance is behind big discounts for investment trusts over the past couple of years.

Weinstein said: “What has caught my attention for the past three years is that the UK trust industry’s discounts have deepened as a consequence of investors losing faith in managers after shockingly poor performance in certain trusts. At the same time, the boards have not held those managers accountable.

“Saba prefers private engagement with the boards of the trusts we invest in, but underperformance, persistent trading discounts and disengaged management teams leave us no choice but to act. The value creation opportunities are vast when trusts are overseen by skilled managers and boards operating with best-in-class governance. This is why we believe change is urgently needed at these trusts.”

However, for five of the seven trusts – Edinburgh Worldwide (0.6% premium); Baillie Gifford US Growth (1.4% premium); Herald (-0.6% discount); Henderson Opportunities (-0.1% discount) and CQS Natural Resources (-1.2%) – their discounts have narrowed notably over the past couple of months and now trade very close to their NAV. All figures are sourced from Morningstar via the Association of Investment Companies (AIC).

In its letter Saba Capital acknowledges that discounts have narrowed over the past six month as "a direct result of Saba building its total stake in these trusts to £1.5 billion."

It added: "Without such buyer demand or the prospect of active steps being taken to improve returns to shareholders, there is a risk of the trusts’ share prices falling and discounts widening again if Saba is unsuccessful in our pursuit to reconstitute the Boards of the seven trusts.”

Keystone Positive Change and The European Smaller Companies Trust have also seen their discounts narrow over the past few months, and they are currently -5.3% and -8.8%. Moreover, the board of Keystone Positive Change announced in September a plan to merge the trust with its open-ended sister fund, the £1.8 billion Baillie Gifford Positive Change strategy.

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If shareholders give the proposals the green light, Saba Capital says each respective board would change immediately, and it will consider altering each investment strategy and fund manager.

It said: “We intend to provide shareholders with long-overdue liquidity options alongside the opportunity for greater long-term returns under a new investment strategy and manager.”

It added that it also “intends to explore possible means by which portfolios of the trusts may be aggregated, where appropriate, to realise scale benefits and synergies”.

Analyst reactions 

Shavar Halberstadt, research analyst at analyst Winterflood, said that for board members across the investment trust sector “the long-feared moment has arrived”.

He added: “Like the Ghost of Christmas Past, Saba has descended upon the investment trust industry, urging self-reflection. There have been rumblings around activist activity in the sector for the last few years, as discounts widened substantially, and individual instances where Saba and Elliott (another activist investor) pushed for action, but none on this unprecedented scale.

“In general, we believe that activism is a natural by-product of benchmark underperformance, widening discounts and the sheer number of funds in some sectors.”  

On the one hand, consolidation is a good thing as it can leave the investment trust sector on a stronger footing.

Halberstadt notes: “We would argue that the Darwinistic developments observed in recent years, with assets migrating towards the highest-quality managers, will leave the sector stronger, larger and more liquid going forward.”

However, Halberstadt points out that “not all activist proposals are helpful”. He added: “In some cases, a strategy might simply be out of favour due to factors outside the manager’s control, and the closed-end fund space is designed to provide long-term capital, after all.”

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In an attempt to keep a lid on discounts, investment trust boards have been buying back their own shares at record pace. According to the latest figures from Winterflood (using Morningstar data), £6.95 billion of shares were repurchased in the first 11 months of 2024. This has surpassed the previous record of £3.9 billion, which was achieved in 2023.

Matthew Read, senior analyst at QuotedData, says Saba’s plan to “quickly deliver substantial liquidity and long-term returns for all shareholders’ are two objectives that are ‘are often mutually incompatible’”.

Read adds that some of the investment trusts it is targeting have underlying holdings that are less liquid.

He says: “Herald being the obvious example as it is a big fund with a huge tail of small illiquid positions that trade by appointment that could take years to sell off and you would likely move the market against you in many of these, particularly once the market spots you as a forced seller.

“The call for substantial liquidity also ignores the unquoted positions held by trusts such as Edinburgh Worldwide and Baillie Gifford US Growth. These are long-term investments and, for some, the payouts can be big as has recently been illustrated by the spectacular success of SpaceX.

“Saba also seems to be targeting trusts facing cyclical challenges – such as CQS Natural Resources. History suggests that when Chinese demand for commodities picks up, this fund will perform extremely well and Saba’s plans would mean that ordinary shareholders miss out on that.”

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Read has urged retail investors to use their votes to have their say. interactive investor has long advocated for the democratisation of AGMs and has implemented a number of initiatives to stop barriers to entry for retail investors and possible disenfranchisement. In November 2021, interactive investor moved to make all customers able to vote at annual general meetings the default setting. 

Read says that if retail investors don’t use their votes, this will result in “large professional investors getting a disproportionate amount of the vote”.

He adds: “This can lead to outcomes that are not in the interests of all shareholders and so we think it is all the more important that shareholders in these funds make sure their interests are being protected and get out and vote.”

Iain Scouller, analyst at Stifel, was more positive. He said that he thinks “quite a number of other shareholders will also be attracted by proposals to provide liquidity and potentially reduce discounts - therefore they will be supportive of the activists.”

He, however, struck a cautious tone on Saba Capital being potentially appointed investment manager of any of the seven investment trusts. 

"Where we think there is likely to be significant pushback is on the idea that Saba should be considered for being appointed as manager of these trusts. We think many of the management houses and individual portfolio managers have been chosen by investors as having expertise in these geographic sectors and in many cases some good long-term track records," said Scouller. 

However, overall, Scouller said he thinks "it is helpful for the sector to have Saba's game plan revealed and shareholders and boards can now take positions for or against these proposals." 

He added: “We also think given Saba's significant voting power by the virtue of the size of their stakes, that they will be successful in changing the boards of a number of the trust's involved. We think it is now over to the boards of the trusts to argue why Saba’s proposals should not be supported - they will need to come up with some strong counter-proposals themselves."