After several years of uncertainty, US hedge fund Saba Capital Management finally made its intentions for the UK investment trust sector clear on 18 December 2024, requisitioning general meetings of seven trusts, including Baillie Gifford US Growth Trust (US Growth), to vote on resolutions to remove the existing, entirely independent boards of directors. Saba hopes to replace these with its own candidates, get itself appointed as manager, and merge all of these trusts into a single vehicle with a new investment remit of attacking other London-listed investment companies. It says it is taking this action in an attempt to address what it claims has been a failure of boards to deal with the stubborn discounts of some of these trusts. We covered this announcement here.

As expected, the announcement has been met with consternation and anger across the sector, with claims of cherry picked data, factually incorrect performance comparisons, and an overall sense of self-interest on Saba’s part, which each of the respective trusts believes would go against the best interest of other shareholders. Adding to the frustration has been the secrecy which had accompanied Saba’s plans, despite various attempts by boards and managers to engage with the US hedge fund manager.

US Growth board response

Baillie Gifford US growth trust outperforms Saba’s Closed-End Funds ETF

Addressing the claims made by Saba, the board of US growth immediately pointed to the performance data of the trust. It observes that, save for the three-year period conveniently selected by Saba in its initial statement, “US Growth has materially outperformed all of Saba’s publicly available funds over recognised measurement periods.”

The board adds that US growth’s shareholders have almost tripled their investment since the trust’s IPO in March 2018, benefiting from a NAV total return of 183.9%, equating to an annualised return of 16.7%.

We note that, for comparison, the Saba Closed-End Funds ETF, which Saba has said is representative of the strategy that it wants the targeted trusts to adopt, has returned 125.8% over the same period.

Benchmark returns have been distorted by the ‘magnificent seven’

It is true that over this time period, US growth has – along with the vast majority of active managers across the globe – underperformed the S&P 500 Index. However, the difference is marginal (about 0.2% per annum) and reflects the extraordinary concentration of index performance attributable to a handful of mega cap tech stocks. Tracking the US benchmark is an outcome almost all investors would be happy with. As evidence of the difficulty of matching the S&P500 Index, the US Growth board observes that the trust’s performance over the past five years ranks it among the top 6% of all UK-listed investment companies and the top 14% of all US Equity open-ended funds and ETFs globally (more than 3,000 funds in total).

US-listed investment companies managed by Saba trade on meaningful discounts

In addition, US Growth’s board notes that Saba’s two US-listed investment companies have traded at average discounts of -7.8% and -10.3% since Saba took over their management.

Saba’s Closed-End Funds ETF has much higher ongoing charges than US Growth

The management fee on Saba Closed-End Funds ETF is 1.1% and other expenses are an additional 1.39%. If we add in the look-through fees on the underlying portfolio, total fund annual operating expenses are 5.81%. By contrast, the ongoing charges ratio for US Growth is just 0.70% (its fees are one of the cheapest in its peer group).

US Growth’s unlisted investments differentiate it from competitors, and provide potential for uplift not available to portfolios of listed companies

Crucially, as the mega cap dominance inevitably falters, the trust appears to be well positioned to benefit. Its board notes that US Growth offers access to exceptional private growth companies, such as SpaceX, Databricks and Stripe, which are typically inaccessible to most investors. Baillie Gifford’s preferential access to the US’s largest and most successful private companies makes it very well-placed to continue to find and invest in the next generation of exceptional US growth companies.

The unlisted exposure makes it hard for Saba to provide the liquidity it is promising

In US Growth’s case, Saba’s plan to “provide shareholders with long-overdue liquidity options” sits at odds with US Growth’s unlisted exposure. The board and the manager believe that these private investments are yet to fully realise their potential. Saba has not explained how these assets, which are illiquid and mostly subject to restrictions on transfer, would be dealt with on a change of mandate or liquidity event. Any attempts to realise these investments quickly are likely to be value destructive.

Does Saba fully understand the UK investment companies market?

This raises the question of whether Saba fully understands the dynamics of the US Growth trust, or others which it has requisitioned. It is well-documented that Saba has been successful with similar attacks in the US, but the UK closed end fund market is fundamentally different. Standards of corporate governance are higher in the UK, and returns have generally been better, so Saba’s approach makes less sense. This is particularly true in US Growth’s case, which has outperformed Saba’s own vehicles and currently trades in line with its NAV.

We do not think Saba’s proposed board would be truly independent

This lack of understanding exhibited by Saba becomes more apparent in its suggested governance approach which proposes that the current independent board should be replaced by two individuals who have close connections to Saba:

• Boaz Weinstein, the founder and chief investment officer of Saba.
• Miriam Khasidy whose husband is a trustee of Saba Capital Income & Opportunities Fund II.

We feel that removing the current board and appointing Boaz Weinstein and Miriam Khasidy could place the company in breach of applicable corporate governance requirements, contrary to the “best-in-class governance” Saba has suggested it will deliver.

The close connections between the proposed directors and Saba are likely to lead to conflicts of interest, and will certainly do so if Saba is appointed as the company’s investment manager. The FCA’s Listing Rules make it clear that the board of directors of an investment company must be able to act independently of any investment manager and also prevent related parties from benefiting unfairly at the expense of other shareholders. How can a board consisting of Saba employees, Saba appointees, and persons that these Saba-connected directors later co-opt onto the board ever be construed as independent?

Saba failed to be open and transparent with the board ahead of its shock announcement

In addition to these practicalities, the US Growth board notes its disappointment in the lack of engagement/good faith from Saba. Having met on two occasions, most recently in November 2024 in person in New York, the board says Saba expressed no concerns in relation to the running, management, governance or liquidity policy of the company. In addition, at each meeting the chair of US Growth offered up the opportunity to meet with the investment manager and Saba specifically declined this invitation.

Saba is seeking to circumvent the usual routes to becoming manager of a UK-listed investment company

We think that if Saba had legitimate concerns around the management and governance of the trust and truly wished to install itself as manager for the benefit of all shareholders, it could have approached the board separately – as opposed to its requestion of seven trusts simultaneously – and put forward a proposal for it to take over the management contracts, which would have been considered on its own merits.

Alternatively, it could have drawn up a prospectus and sought to IPO its proposed company by convincing prospective investors of the merits of its approach.

Shareholders should be highly concerned that Saba is trying to force their hands and those of their boards.

Saba could and should have made more explicit commitments to act in investors’ best interests

If Saba plans to make itself the manager, we are firmly of the view that it should not have any representation on the board, let alone control these boards, even for the briefest of periods.

We also think that it would be difficult for external shareholders to hold Saba to its promises once they have control of the board, and certainly not without expense or with a lag.

We also believe that, if Saba is serious about protecting other shareholders interests, these protections should have been built into the foundations of its proposals. The fact that is not the case is a major red flag for us and we think that external shareholders should, at the very least, vote down the current proposals and make Saba offer improved assurances.

QuotedData believes you should VOTE AGAINST Saba’s proposals

In the view of QuotedData, we believe it is exceedingly difficult to see how Saba’s proposed interventions can add value to the shareholders of US Growth. It goes beyond all reason to cede control of the trust to one dominant shareholder that can then act entirely in its own interests. For these reasons we have been urging shareholders to get out and vote against this to protect their interests.

Importantly, we strongly suspect that Saba is counting on other shareholders not voting their shares to give it the best chance of taking effective control of the company. Traditionally, large professional investors, who almost always vote their shares, get a disproportionate share of the vote as smaller investors are less likely to exercise their voting rights. With Saba controlling 28.4% of US Growth’s share capital, the trust will require a strong turn out from all of its shareholders in order for requisitioned resolutions not to pass. Accordingly, it is very important that ALL shareholders, no matter how small, vote. The future of your investment depends on it.

Marten & Co (which is authorised and regulated by the Financial Conduct Authority) was paid to produce this article on Baillie Gifford US Growth Trust.