Activist Saba unleashes campaign against seven investment trusts

US hedge fund clears up months of mystery over its intentions, calling for meetings to oust the boards at seven trusts it accuses of failing shareholders. These include three at Baillie Gifford and two at Janus Henderson.

After months of mystery over its intentions, activist Saba Capital today launched campaigns for change at seven investment trusts in which it is the leading shareholder with stakes of 19-29%.

The New York based hedge fund manager has requisitioned general meetings at three Baillie Gifford trusts: Baillie Gifford US Growth Trust (USA ), Edinburgh Worldwide (EWI ) and Keystone Positive Change (KPC ) alongside two from Janus Henderson, Henderson Opportunities Trust (HOT ) and European Smaller Companies Trust (ESCT ) and separately CQS Natural Resources Growth & Income (CYN ) and Herald (HRI ), the global technology fund run by veteran manager Katie Potts.

Saba, founded by Boaz Weinstein, wants to reconstitute the boards and punish them for failing to hold their fund managers to account over the wide share price discounts and ‘their inability to deliver sufficient shareholder returns’.

At the meetings, which Saba thinks should take place by early February, it wants shareholders to replace the current boards and deliver on its plan to ‘quickly deliver substantial liquidity and long-term returns for all shareholders’.

This is a reference to the tender offers and intensified share buybacks it is likely to call for. Tender offers would allow investors to sell their shares back to the company at close to net asset value (NAV), but if repeated will shrink the trusts and could threaten their viability.

The new directors Saba wants appointed include Weinstein and Paul Kazarian, the Saba portfolio manager who battled European Opportunities Trust (EOT ) over its tender offer a year ago. The others are listed as: Miriam Khasidy, Marc Loughlin, Jonathan Zucker, Doug Hirsch, Simon Reeves, Jassen Trenkow, and John Karabelas.

Saba could merge holdings

Saba says it has invested £1.5bn in UK investment companies with broker Peel Hunt identifying disclosable stakes in 24. Of these, in 15, Saba has established positions of 10% or move in the voting rights. This puts the group in a strong position to expand its campaign for shareholder value should it wish.

As a sign of this, Saba says that although it does not intend to lift its stakes to over 30% – the level at which it would be required to make a bid –  it states its ambition is to merge the holdings and manage them possibly within a new activist fund.

Weinstein (above) says, ‘following the potential replacement of applicable investment managers, Saba, as a shareholder, intends to explore possible means by which portfolios of the trusts may be aggregated, where appropriate, to realise scale benefits and synergies.’

The stake-building by Saba, an established activist in US closed-end funds, has seen the double-digit discounts of its targets narrow as the market has anticipated today’s announcement.

In the case of Baillie Gifford US Growth, Edinburgh Worldwide, CQS Natural Resources and Herald, the discounts have virtually disappeared with the shares trading around ‘par’ or NAV for the first time in years.

Board failure

In an open letter, Weinstein urges shareholders to rally to its cause, saying the job is not over.

‘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 we are unsuccessful in our pursuit to reconstitute the boards of the seven trusts,’ he writes.

Weinstein accuses the managers and boards of having failed shareholders with returns of six trailing their benchmarks by 7% to 53% over three years. The exception is Janus Henderson’s Ollie Beckett’s European Smaller Companies which has beaten its index by 11%.

Nevertheless, all seven have, Saba believes, let their shares trade at an average 12-14% below NAV in the past three years. The period has, however, witnessed extremely turbulent markets in the aftermath of the Covid pandemic and Ukraine war with surging inflation and interest rates combining with an exodus from the UK stock market by domestic investors.

None of the companies has yet responded. Saba will doubtless face questions and criticism over whether its interests are aligned with long-term shareholders. Herald, for example, has just published its performance statistics showing that since launch in 1994 it generated a 2,491% total return, well above the 757% of the Russell 2000 Technology index.

Strong position

Stifel analyst Iain Scouller believed the trusts’ boards would have to come up with strong counter-proposals to win the day as Saba’s large stakes and the likelihood that many retail investors would not vote, put the activist in a commanding position to push through changes.

‘We also think 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 said.

However, he warned Saba would encounter ‘significant pushback’ if it tried to be appointed fund manager of the trusts, saying it would need to demonstrate its expertise.

The analyst also cautioned against the creation of an activist trust of trusts. Previous attempts had seen listed consolidation vehicles suffer from poor investor demand with their shares also trading on wide discounts, he said.

‘Short-term’ attack

Matthew Read, senior analyst at QuotedData, viewed Saba’s approach as ‘very short-term in nature’ and said it would be critical for all shareholders in the trusts to vote and protect their interests. 

He said Saba’s call for investors to cash out ignored the fact that the US Growth and Edinburgh Worldwide trusts held big weightings in unquoted stocks that were not easy to sell, while Herald owned stakes in smaller companies that were also illiquid. 

Read also thought it strange Saba was targeting Keystone Positive Change when it was poised to merge with an open-ended sister fund that would effectively allow investors to exit at asset value.

‘This and the other challenges we highlighted above have long made us feel that Saba doesn’t really understand some of the funds that it is invested in,’ said Read, pointing out that the UK investment company market was very different from the US.