The mass derating in the UK investment companies sector is by turns painted as a normal cyclical downturn, by turns as an existential crisis.

One investor clearly spying an opportunity is Saba Capital Management, run by American hedge fund manager Boaz Weinstein (pictured above), which has quietly started buying stakes in investment trusts trading on big discounts to net asset value (NAV).

In a sign of what may be to come, Weinstein is already engaged in a high-profile battle with BlackRock over its closed-end funds in the US, a sector with close parallels to London-listed investment companies.

While there is no indication that he has turned activist in the UK market yet, multiple figures close the sector said that was a possible next step.  

‘Should that attract attention I think it’s probable we’ll see others,’ said one person working at an asset manager involved in the sector.

What we know

Saba has so far bought into equity trusts including BlackRock Smaller Companies (BRSC ), Schroder UK Mid Cap (SCP ) and JP Morgan European Discovery (JEDT ). It is the biggest institutional holder of Henderson Opportunities (HOT ) with a 7.1% stake.

Most recently, the firm upped its position in European Opportunities (EOT ), which is run by ex-Jupiter manager Alexander Darwall and has struggled to shake its 10% discount. Saba now owns more than 5% of the £759m trust, according to stock exchange filings, and could feasibly be exerting pressure ahead of a continuation vote next month.

Among trusts in the process of winding up, the New York firm also owns Abrdn Smaller Companies Income (ASCI ) and was pivotal in voting against Crystal Amber (CRS ) in a continuation vote two years ago.

The Bill Ackman-run Pershing Square Holdings (PSH ) is another significant bet. Along with European Opportunities it is a top 10 holding in the Saba Capital Income & Opportunities Fund, which is itself a US closed-end fund.

Curiously enough, Ackman is an associate of Weinstein, with the pair part of a group that is trying to buy fellow New York hedge fund Sculptor Capital Management.

Admittedly, some of the rumours surrounding Weinstein’s intentions in the UK look extreme.

One industry figure suggested Saba had already committed as much as £500m to the investment trust sector, with some of that possibly via nominee accounts.

Another source suggested that Weinstein was looking to raise up to $1bn for an investment trust-focused strategy – a figure which would meaningfully add to its $9.7bn assets under management (as per a filing with the US regulator).

Saba Capital Management declined to comment on its plans.

While Citywire could not corroborate these specific numbers and others downplayed the idea the firm was covertly building stakes via nominees, analysts said that its entry into the sector could prove very significant.

BlackRock battle in US

Weinstein is best known is best known for credit and arbitrage strategies, having been co-head of global credit trading at Deutsche Bank before founding Saba in 2009. The firm also runs a strategy investing in closed-end funds, which has been an increasing focus.

‘Closed-end fund arbitrage is the thing I’m most interested in today because it is tangible. It’s an arbitrage that you can collapse yourself,’ Weinstein told a Bloomberg conference in June, revealing 46% of his flagship fund was now invested in the sector.

This year the investor has begun a public spat with BlackRock, in particular, over its ‘CEFs’ in the US. That comes as part of a broader campaign, played out in media appearances, tweets and even legal action, against managers whose funds are trading at discounts.

To sum up: @BlackRock has 7 independent directors out of 630 BlackRock CEF board seats. @jpmorgan has 93 independent directors out of 93 JP Morgan CEF board seats.

What an utter embarrassment BlackRock is making of itself. Let’s see if they have the discipline to change course.

— boaz weinstein (@boazweinstein) August 2, 2023

The chess-enthusiast fund manager is pushing for actions from representation on boards to ‘open-ending’ CEFs – a step which does sometimes occur in the US and would allow investors to pull their money out at NAV.

In June, Saba filed a lawsuit against 16 closed-end funds run by BlackRock and other firms that have adopted provisions which limit the voting rights of new shareholders.

BlackRock has consistently pushed back, arguing Saba is interested in short-term gain rather than governance.

Here’s @BlackRock’s quote which has got to be intentionally misleading: “The truth is this is a hedge-fund manager who is using its sheer size and assets to take control of closed-end funds for its own benefit at the expense of the retail investor,” said Stephen Minar, managing…

— boaz weinstein (@boazweinstein) July 29, 2023

Potential to turn vocal

Among UK trusts, the widening of discounts since 2022 has broadly been ascribed to weak sentiment along with the dramatic jump in interest rates and yields.

Saba’s apparent thesis on the sector is to buy equity trusts on the cheap and benefit from discounts narrowing as conditions improve. Analysts said after a slow start that has become more active recently, even suggesting they were buying somewhat indiscriminately based on discount levels.

Saba, which has occasionally taken stakes in trusts in the past, is seen as a different animal to classic discounting hunting investment firms like City of London and 1607 Capital Partners (also the top shareholder in European Opportunities trust) that tend to operate behind the scenes. As the BlackRock example shows, there is potential for Weinstein to turn not just activist but to do so publicly and aggressively.

The associated arbitrage strategy involves buying a trust and shorting stocks in its portfolio to try to take advantage of the difference between the share price and NAV.

As one example, Saba has disclosed a significant short position in De La Rue. The troubled banknote-maker is a big holding in Crystal Amber, which will need to offload that stake as part of winding up.  

‘It’s been slightly surprising there hasn’t been more in the way of arbitragers or vulture funds arriving already this cycle,’ said Andrew McHattie, a long-time commentator on the sector and author of the Investment Trust Newsletter.

‘While at the moment there doesn’t appear to be any aggressive intent that’s always a possibility,’ he added. 

McHattie noted that in the mid-1990s, several arbitragers were active players in investment companies. One factor that is different today may be the shift in the sector towards alternative assets, where arbitrage opportunities are more questionable and illiquid assets tougher to realise.

However, private markets bidders have venturing into the space. Notably, both Civitas Social Housing (CSH ) and Round Hill Music Royalty Fund (RHM ) have succumbed to bids at discounts to NAV buy premiums to their unloved shares.