A version of this article was published in yesterday’s Questor column in the Telegraph.

European Opportunities Trust (EOT ), once the best performing listed fund in its sector, is embroiled in a struggle with US activist investor Saba Capital that has left shareholders with a tricky decision over whether to sell some of their shares in a ‘tender offer’.

Tender offers give shareholders the opportunity to sell shares back to a company at a level above their current price. Trusts don’t do this to be charitable but to release unhappy investors reluctant to sell when their shares trade well below their asset value. 

Investors in the £830m trust, run by Alexander Darwall at Devon Equity Management, have reason to be discontented. Five years ago it was the top-performing European investment trust, but the collapse from fraud in 2020 of Wirecard, the German payments processor that had accounted for 14% of the portfolio, damaged Darwall’s credibility.

The poor performance of some of his other stock picks led to the shares falling to the bottom of its sector. Its five-year total return to 9 January of 19.6% lags well behind the 53.6% average of the seven trusts investing in large European companies. It also trails below the 47.4% of the MSCI Europe index. Since its launch in 2000, however, it has beaten the benchmark with a 10.2% average annual shareholder return against 5.8% from the index.

At the end of last year, faced with a triennial continuation vote, European Opportunities announced two tender offers. Both offered to buy back up to a quarter of the shares at 2% below net asset value, compared to the 12% discount at the time. 

The first tender offer unveiled in October was ‘conditional’ and will only take place in 2026 if the trust’s underperformance continues for another three years.

This wasn’t enough for its top four shareholders with 41% of the shares. These were institutional value investors which buy trusts on wide discounts and sell when their share prices rerate to NAV. They saw no reason why they should wait.

In response, in early November the trust’s board proposed a second 25% tender to take place this month. New York based Saba, the most aggressive of the value investors with a then 10% stake, demanded more.

It threatened to vote against the continuation resolution if the tender offer was not doubled to 50%, an unprecedented demand that would have halved European Opportunities.  

Paul Kazarian, a Saba partner, argued that the trust would still be viable at £400m. He said it was necessary to clear out all investors who wanted to sell and prevent the trust falling back to a 15% discount, the level at which Saba bought in last summer.  

‘This could lead to all shareholders suffering a net loss in value, even the ones who participate in the tender,’ he claimed in a letter to European Opportunities chairman Matthew Dobbs.  

Dobbs, a former Schroders Asia fund manager, dismissed this as ‘conjecture’ and said the 50% tender ‘would not be in the best interests of the majority of shareholders’ who would see the shares become less liquid and more expensive to trade.

The following week the trust passed its continuation vote but with 37.7% of votes cast against. A month later, before Christmas, shareholders approved this month’s 25% tender offer.

So where does this leave shareholders? At face value, the chance to sell at 2% below NAV is still a good offer although not as compelling now the discount has narrowed to 8%, reducing the uplift after expenses to over 5%.

Richard Pavry, the Devon chief executive hoped private investors would take part as big online stockbrokers now make it easier for individuals to respond to corporate actions.

Time is short, though, with the offer ending on 29 January. Investors selling shares outside an ISA or pension also need to consider capital gains tax and should take professional advice. Investors will get their cash in the week of 5 February. 

Pavry said some investors might sell their shares and then buy back in again. Shareholders who did not participate would still benefit from a small 0.65% uplift to the trust’s net asset value, he said.  

Darwall has already sold £220m of investments in preparation for the tender offer which is certain to be fully taken up. The question is how over-subscribed it will be. If up to 70% of shareholders apply to sell shares it will raise questions about the trust’s future.

The board is bound to reject any calls for a wind-up, at least initially. It claims regular share buybacks and another continuation vote and tender offer in three years’ time are sufficient to protect investors.

Winding up the fund would be a massive blow to Devon Equity, which Darwall set up after leaving Jupiter Asset Management five years ago.  

Both sides agree the trust’s future ultimately depends on Darwall’s performance improving. Supporters point to the success of his long-term holding in Novo Nordisk, the Danish maker of blockbuster weight-loss drugs, as proof of his skill. However, the size of the stake at 12% of the trust may worry some with echoes of the large position he developed in Wirecard. 

Questor thinks investors should sell a quarter of their holding in the tender offer and retain the rest. Non-shareholders should look for the discount to widen after the tender offer before considering buying in.  

Note: Since this article was published in the Telegraph, European Opportunities’ share price discount has now narrowed further to 7%.