Saba lifts stake in Janus Henderson’s European small-cap trust to 29%

Saba Capital has hiked its stake in European Smaller Companies Trust (ESCT ) to 29%, prompting speculation over the activist hedge fund’s intentions as the investment company prepares to hold its annual general meeting on Monday.

Since lifting its position to 14% on 28 October, New York-based Saba has more than doubled its holding in the £655m investment trust managed by Janus Henderson.

A stock exchange notice yesterday showed that, after a series of trades this month, as of Tuesday Saba held 11.7% in shares and 17.4% in derivative swaps, making it the biggest investor in the top-performing European small-cap trust.

At this level, Saba lies just below the 30% threshold that would require it to make a bid and raises the prospect of a second battle with a European trust. A year ago it locked horns with European Opportunities (EOT ), forcing the board to hold a 25% tender offer, though Saba’s demands for a 50% share repurchase were resisted.

Market observers are waiting with bated breath to see what, if anything, Saba does. It could block the re-election of directors, such as investment banker James Williams, who joined the board last year and is set to replace former KPMG partner Christopher Casey as chair.

Alternatively, it could obstruct the ability of the board to buy back or issue shares – powers that are normally routinely approved by shareholders.

Having established holdings in numerous trusts as their shares traded at lows in the past two years, Saba could also be playing a long game.

The trust, which under lead manager Ollie Beckett has performed resiliently through Europe’s political and economic challenges, is due to hold a triennial continuation vote in a year’s time, raising the possibility of Saba attempting to seize control.

If that were to happen, Saba founder Boaz Weinstein would have a platform to step up his firm’s activism among investment trusts, many of whose shares are trading on wide discounts after a downturn caused by high inflation and rising interest rates.

He could then replicate Saba’s record in the US, where it has challenged investment giants including BlackRock when shareholder returns in investment companies have been poor.

Since its conflict with EOT, Saba appeared to have gone quiet, although a recent resumption in stakebuilding has lifted its position in Middlefield Canadian (MCT ) to a commanding 27.4%. The announcement of an investment shake-up at Edinburgh Worldwide (EWI ) this week also belied its influence given its 18% holding in the Baillie Gifford global small-cap trust. The activist was also instrumental in Keystone Positive Change (KPC ) calling it a day and proposing to merge with an open-ended fund its Baillie Gifford managers also run.

Nevertheless, the decision to target ESCT is intriguing. Unlike Saba’s forays into EOT, or Baillie Gifford flagship Scottish Mortgage (SMT ) where it made a substantial return last year, ESCT has not suffered severe performance problems.

A flat total shareholder return of 0.6% over three years compares well to the sector average 17.8% decline, while over five years ESCT shareholders have enjoyed a 70.3% return that is nearly double the 37.3% advance in the MSCI Europe ex UK index (source: Deutsche Numis).

The shares trade at about 7% below net asset value, although that has narrowed in response to Saba’s latest purchases, having stood at a much wider average discount of 13.5% in the year to 30 June.

Saba appears to like European trusts, having also built a 13.5% stake in JPMorgan European Discovery (JEDT ) and likely pushing for the 15% tender offer the board made this year following the replacement of the fund managers after a long period of poor performance.

Janus Henderson and Saba declined to comment.