Activist Saba launches a coup of directors and management at seven London-listed investment funds

An activist investor hopes to take control of seven underperforming London-listed investment funds after urging shareholders on Wednesday to sack their respective boards.

Saba Capital published an open letter to shareholders of the seven trusts, calling on them to vote to dismiss entire boards and replace them with “new, highly qualified candidates” – including the hedge fund’s own directors.

Saba has built up stakes of 19 to 29 percent in each of the trusts, which have suffered massive discounts to their net asset values ​​as investors have shunned their shares.

The affected trusts are Baillie Gifford US growth, CQS Natural Resources Growth and Income, Edinburgh worldwide, European smaller companies, Henderson odds, Herald Investment Trust And Keystone positive change.

Targeting trusts with deep discounts to net asset value is a key part of Saba’s investment strategy, on the basis of which it hopes to build an ETF focused on London-listed investment companies.

Boaz Weinstein, founder and chief investment officer at Saba Capital, told shareholders of each trust that the “inability of their current investment manager and board to account for the gap between each trust’s trading price and its net asset value represents a significant value for has destroyed the shareholders’.

He noted that each trust has seen its discount to NAV decrease significantly over the past six months, although Weinstein attributes this to the impact of Saba increasing its stake.

‘Without such demand from buyers or the prospect of active steps being taken to improve shareholder returns, there is a risk that trust share prices will fall and discounts will increase again if we fail to convince the boards of the seven Trusts to be reconstituted. he added.

Saba has called on each trust to organize a general meeting ‘as soon as possible’ where shareholders can vote on the proposal ‘no later than early February’ next year.

It hopes that Weinstein will be appointed to the board of directors of Baillie Gifford US Growth, while the director of Saba’s investment funds, Paul Kazarian, will join the boards of the other six.

Saba has also nominated seven independent directors, each of whom will join one of the boards.

Weinstein said: “The managers of the trusts and their directors have failed the shareholders. The performance shows that they have not taken sufficient steps to resolve the Trusts’ structural problems, depriving shareholders of superior returns.

“While there are multiple levers to limit these continued cuts, inaction has been the consistent course of current leadership.”

“By completely reconstituting the trusts’ boards, we believe we can unlock greater value for shareholders and address the long-term structural issues that have hampered the trusts’ return potential under current leadership.

“Each of the director nominees shares a deep commitment to improving shareholder returns and putting your interests above their own.”

A ‘clear error’ in Saba’s strategy?

Baillie Gifford, manager of US Growth, Edinburgh Worldwide and Keystone Positive Change, acknowledged the letter but made no further comment.

This is Money has also contacted Janus Henderson, manager of European Smaller Companies and Henderson, and Herald Investment Management for comment.

Below, Matthew Read, senior analyst at investment trust specialist Quoted Data, explains why he sees ‘an obvious flaw’ in Saba’s strategy.

“Saba wants shareholders to replace the current boards and implement its plan to “quickly realize substantial liquidity and long-term returns for all shareholders.”

‘However, the two are often mutually incompatible, especially for some of the funds it targets where the underlying investments are less liquid.

‘Herald (is) the obvious example because it is a large fund with a huge range of small illiquid positions that trade by appointment and can take years to sell out, and in many of these cases the market would probably trade against move, especially if the market sees you as a forced seller.

‘The call for substantial liquidity also ignores the unlisted positions of trusts such as EWI and USA.

“These are long-term investments and for some the payoffs can be large, as recently illustrated by the spectacular success of SpaceX. Saba also appears to be targeting trusts facing cyclical challenges, such as CQS Natural Resources.

“These and the other challenges we highlighted above have long given us the feeling that Saba does not really understand some of the funds in which it invests. It is well documented that Saba has been successful with similar attacks in the US, as well as in Britain. The closed-end fund market is fundamentally different.

‘Corporate governance standards have been higher and returns have generally been better, so this type of approach makes less sense, especially now that progress has been made in addressing issues such as the issue of cost disclosure and so the discounts are now being cut back.

‘It appears to us that their approach is very short-term in nature and this highlights a long-standing problem that, because many retail investors hold their shareholdings through platforms and do not tend to vote, large professional investors hold a disproportionate share of the get votes. .

‘This can lead to outcomes that are not in the interests of all shareholders. That is why we think it is all the more important that shareholders in these funds ensure that their interests are protected and vote.’