Activist hedge fund Saba Capital Management has doubled its position in Keystone Positive Change (KPC ) to 10%, prompting the struggling Baillie Gifford investment trust to set a 2027 continuation vote and start buying back its depressed shares.

Stock exchange filings show that Saba, a New York hedge fund targeting numerous investment trusts on wide discounts, earlier this month lifted its stake in the £149m portfolio to 10%, mostly through derivatives known as total return swaps rather than shares.

Data from Refinitiv indicates that this makes Saba Keystone’s second-largest shareholder after wealth manager Rathbones, which holds 10.4%. This puts the activist in a powerful position to push for share buybacks to narrow the 14% discount to which the trust has fallen in the growth selloff of the past two years.

Fears that sustained buybacks could not only shrink the trust below £100m and make it unattractive to institutional investors, but were also pointless in the grip of a bear market, had made the board reluctant to repurchase its stock, although buybacks have become commonplace amid a widespread derating of investment companies this year.

Annual results yesterday indicated a softening in Keystone’s position. Alongside a promise to hold a continuation vote in three years’ time in response to the ‘disappointing’ 25% slump investors have suffered under Baillie Gifford, chair Karen Brade said buying back shares cheaply would be considered when they benefited shareholders by increasing the trust’s asset value.

Soon after the trust bought back 20,000 shares at 204p, which will be held in treasury until such time as they can be re-issued when investor demand improves.

Although the £40,000 transaction is not large it is significant, particularly if further buybacks follow in a bid to reduce the amount of stock in the market when there are no buyers.

Brade, who oversaw the sacking of Invesco in December 2020 after its UK equity strategy badly underperformed, committed the board to holding a continuation vote at the AGM in February 2027, which she said would be the first shareholder meeting ‘following a period of five full financial years since the adoption of the positive change strategy’.

Bottom of the table

The announcement came as Keystone, which invests in companies across the world deemed to be making a positive impact on society or the environment, confirmed a limited rebound. Net asset value rose 7% in the 12 months to 30 September, a sharp improvement on the previous year when assets plunged 35%. Nevertheless, this underperformed its benchmark the MSCI All Country World index which rose 11%. Shareholders received just 6% because of the lagging share price and widening discount.

This leaves Keystone, a stablemate of the £2.6bn open-ended Baillie Gifford Positive Change fund, as the worst-performing Global investment trust over five and ten years. Over those periods shareholders have lost 24% and 18% respectively, although before February 2021 it was run as a UK equities fund.

Co-managers Kate Fox and Lee Qian agreed the performance over the past year was ‘disappointing’ but said they continued to focus on the long term and search out ‘industries that are vital for the transition to a sustainable and inclusive future’.

The biggest detractor over the year was Safaricom, which provides telecoms and mobile money services in Kenya and recently expanded into Ethiopia.

The Ethiopian expansion has been a stumbling block as it hit near-term profits, while macroeconomic challenges in Kenya resulted in a depreciation of the country’s currency.

‘In these tough conditions, Safaricom still grew its revenues, especially for its mobile money service, M-Pesa, which demonstrated the resilience of the business and its importance to customers,’ said the managers.

‘Nevertheless, Safaricom’s share price declined significantly in sterling terms.’

The duo invested in six new companies over the year, with positions in Autodesk, Remitly and HDFC disclosed.

They also invested in Boston Metal, a private company commercialising a novel technology for producing green steel. The managers said the technology will allow for steel production to be decarbonised in a more cost-effective way.

They also took a stake in WuXi Biologics, a Chinese research and manufacturing group that is listed in Hong Kong and focuses on biologics drugs.

Daikin Industries, a company operating in the heating, ventilation, and air conditioning industry, was added to the portfolio because of its ‘innovation and environmental leadership in air conditioning’ but was swiftly removed when it emerged it made white phosphorous smoke bombs for the Japanese ministry of defence for training purposes.