Investment trusts under fire from Saba Capital are taking ‘unprecedented’ action to mobilise retail shareholders and ensure they take part in a ‘vital’ vote for the future of their investments.

The New York hedge fund manager sent shockwaves through the investment trust industry just before Christmas when it requisitioned seven investment trusts – Baillie Gifford US Growth (USA ), Keystone Positive Change (KPC ), Edinburgh Worldwide (EWI ), Herald (HRI ), CQS Natural Resources Growth & Income (CYN ), Henderson Opportunities (HOT ), and European Smaller Companies (ESCT ) – in a bid to oust boards it criticised for overseeing extended periods of poor performance, wide discounts, and destruction of shareholder value.

The trusts and Saba have since engaged in a flurry of tit-for-tat public exchanges, with each accusing the other of making misleading statements. However, behind the scenes, the boards of the trusts are scrambling to alert investors to the need to vote in the general meetings, something that is proving a headache given the large number of retail investors in each of the trusts.

According to estimates from Winterflood, CQS and Henderson Opportunities have the largest retail exposure at about 45%, followed by Edinburgh Worldwide at 40%, while 30% of the share registers of European Smallers, US Growth, and Keystone are made up of retail investors. Herald has the lowest exposure at an estimated 20%, arguably making it a tougher target. 

While big institutional investors, such as wealth managers, pension schemes and other fund managers, are easily contacted, retail investors typically invest via one of the large UK investment platforms – such as Hargreaves Lansdown, Interactive Investor, and AJ Bell – meaning the trusts do not have individual shareholder details or the ability to contact them directly.

On top of this, there is typically a very low retail shareholder turnout when it comes to voting, which the trusts have warned could lead Saba to victory purely through shareholder inertia.

By way of example, CQS Natural Resources attracted just 10.2% shareholder turnout at a continuation vote it overwhelmingly won in December. 

Keystone Positive Change chair Karen Brade told Citywire that it was ‘absolutely vital’ that investors turn out to vote, adding that 40% of investors in the £159m Baillie Gifford-run trust were retail and the majority invest via platforms.

‘If you don’t vote you are providing tacit support for Saba,’ Brade said.

Keystone and others are under severe pressure from Saba’s actions, given that the hedge fund manager has submitted its requisitioned proposals as ordinary resolutions. That means they only require a simple majority of shareholder support, or more than 50% of votes cast, in order to pass.

Saba has declared an interest of 28% in the trust, built primarily through derivative swaps, and has positions of a similar magnitude in most other targets. 

Brade accused the activist investor of ‘taking advantage of our structure’ and being ‘disingenuous’ in its demands for the trust to deliver a cash exit in the first quarter of this year via a proposed scheme, before then later rejecting the proposal when the board delivered it.

‘We need to get all the retail shareholders out to vote,’ said Brade.

‘I have to win the requisition and vote them down. Then we will go back and rescue the [cash exit] scheme or we will find another way to get money back to shareholders.’

Baillie Gifford US Growth, which at £803 in market value is the second-largest target, is working with platforms to get the message out to shareholders.

Board director Sue Inglis said one ‘big platform’ had ‘reached out to see what it could do to help’. That platform is flagging the vote as a ‘corporate action’, so users who have opted out of receiving other voting communications will still receive details of the general meeting.

‘We have also asked about the legal procedure to get the underlying names using the platform and want to send a short letter with a guide to voting,’ Inglis said.

The trust has also hired Georgeson, a specialist in shareholder engagement, to help drum up support. The consultant has also been put on the payroll at Henderson Opportunities and European Smaller Companies, which said Georgeson will ‘help it reach all shareholders, explain the situation, and help them to vote their shares’.

Inglis said her trust was taking ‘unprecedented’ action to encourage investors to vote following the ‘blitz attack’ by Saba on the investment trust industry.

‘Shareholders need to vote to make a difference,’ she said, adding that Saba was ‘expecting people not to vote’.

Shareholders in the self-managed Herald, the largest trust targeted at £1.2bn, which is run by Katie Potts, will face the first vote on 22 January. This will be followed by US Growth and Keystone on 30 January, CQS and Henderson Opportunities on 4 February, and then European Smaller Companies on 5 February. Edinburgh Worldwide has been able to delay setting a voting date.

For investors in the seven trusts, the Association of Investment Companies (AIC) has a how-to guide on voting: AIC How to Vote Guide