Look out Baillie Gifford and BlackRock! Saba lifts stakes in 11 trusts

Activist Saba Capital has upped its stakes above 5% in 11 investment companies apart from European Opportunities in the past month through derivatives and share purchases.

Saba Capital, the US activist investor that has turned hostile to European Opportunities Trust (EOT ), has used derivatives to help hike positions in 11 other UK investment companies to more than 5% in the past month, raising the prospect of further battles to come.

In October, Saba (which is run by American hedge fund manager Boaz Weinstein) doubled its stakes in Edinburgh Worldwide (EWI ), the Baillie Gifford global smaller companies fund, and BlackRock Smaller Companies (BRSC ) to 10% and 10.2% respectively through purchases of total return swaps, disclosures to the London Stock Exchange show.

Swaps allow an investor to gain exposure to an asset without having to own it. The swaps are bought from an investment bank which buys the underlying investment company shares and passes on the income and capital gains to Saba in return for a fee.

The savage derating of closed-end funds this year, with shares of many trading on steep discounts to net asset value, present lucrative buying opportunities for activist investors and justify the costs of buying swaps, observers say. Edinburgh Worldwide and BlackRock Smaller trail on discounts of 19% and 14% to the value of their underlying assets.

Analysts say swaps can be structured to include voting rights, and the stock exchange notices from the trusts make it clear that Saba does have the ability to vote through these positions. This is a crucial point for an activist firm such as New York-based Saba, which will press investment company boards to take more effective actions to narrow share price discounts, thereby boosting the value of its stakes. 

In late September, Saba opened two positions of more than 5% in CQS Natural Resources Growth & Income (CYN ) through a total return swap, and in European Opportunities (EOT ) where by contrast it bought the shares before pushing the board to offer a 100% tender offer.

In an open letter to the chairman on Friday, Saba called EOT’s plans for a performance-related 25% tender offer ‘woefully insufficient’ and said it would vote against continuating the investment trust at the annual general meeting next month.

Following the move Thomas Pocock, analyst at Peel Hunt, said he would be ‘unsurprised’ to see Saba take more public action across its other trust holdings.

Those holdings are numerous, with the hedge fund group having exposure to at least 17 investment companies, nine of which have seen a recent increase in stake.  

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Trust Overall stake including swaps Direct shares Date of increase
Edinburgh Worldwide (EWI ) 10.03% 0.02% 16-Oct
BackRock Smaller Companies (BRSC ) 10.20% 3.50% 11-Oct
CQS Natural Resources Growth & Income (CYN ) 5% 0% 20-Sep
European Opportunities (EOT ) 5% 5% 05-Sep
Baillie Gifford US Growth (USA ) 5.10% 0.40% 30-Aug
JP Morgan European Discovery (JEDT ) 11.10% 0.10% 10-Aug
Herald (HRI ) 5.30% 0.65% 28-Jul
Keystone Positive Change (KPC ) 5.20% 0.00% 24-May
Schroder UK Mid Cap* (SCP ) 5.65% 4.10%  

 Source: Citywire, London Stock Exchange *Disclosure states this position was taken in Sept 2022, but not announced until Sept 2023. 

Along with these trusts, Saba owns 7.1% in Henderson Opportunities (HOT ) directly through shares and holds 26% of shares in Crystal Amber (CRS ), the activist investment fund it pushed into a wind-down two years ago when it voted against its continuation poll.

The group also has numerous smaller holdings in the sector through its Saba Capital Income & Opportunities fund, a US closed-end fund, according to a disclosure made at the end of July. These include Bill Ackman’s Pershing Square Holdings (PSH ) and EOT, both of which are in the top ten, along with Schroder British Opportunities (SBO ), Abrdn Smaller Companies Income (ASCI ), JP Morgan Mid Cap (JMF ), Abrdn Diversified Income and Growth (ADIG ) and The European Smaller Companies Trust (ESCT ).

Saba’s closed-end fund also holds some exposure to Schroder UK Mid-Cap, Henderson Opportunities, BlackRock Smaller Companies, and JP Morgan European Discovery.

Activist activity has picked up in recent weeks with both Asset Value Investors and Metage coming out with public letters stating dissatisfaction with actions taken by Hipgnosis Songs (SONG ) which faces a continuation vote this Thursday. 

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