Shareholders in the Herald Investment Trust voted against the proposals of US hedge fund Saba Capital this week, in the first of a series of critical votes as Saba seeks to make board changes at several investment trusts.
Saba has requisitioned General Meetings of six other trusts to remove their existing directors and replace them with its own nominees.
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “It’s very encouraging to see Herald shareholders turn out to vote in such numbers. This is a victory for shareholder democracy. There are six other trusts with votes just around the corner. It’s vital that all shareholders vote on the future of their investment trust. Shareholders need to act now.”
Saba Capital was sanguine about the news:
“We appreciate the thoughtful engagement from fellow [Herald] shareholders in recent weeks, which only reinforces the dire state of the investment trust industry and need for Saba’s presence in the market. Over a brief period, our campaign has already enhanced value for shareholders and incited positive change at HRI – and elsewhere in the UK market – as evidenced by discounts to net asset value narrowing and numerous trusts announcing shareholder-friendly actions.”
Saba said it felt the developments were encouraging, but argued that more change is required within the sector in London. It argued that the investment trust industry is failing to protect shareholders from losses due to poor performance and widening discounts.
The hedge fund also claimed it would continue to pursue the changes that it believes are necessary to improve the Herald investment trust after what it called “three years of poor returns and two decades of abysmal discount management by Katie Potts.”
Potts is the managing director and lead fund manager at Herald Investment Management. She established the firm in 1993 to manage the Herald Investment Trust, which she launched in 1994.
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Saba has established a number of positions across more than a dozen investment trusts in London, taking advantage of discounts to NAV within the sector. The situation has created an opportunity for the activist hedge fund to force board level changes and potentially take over as manager of the trusts. It is a plan that looks like it has been many months in the making.
Next Wednesday, 29 January, is the deadline for retail investors in both Baillie Gifford US Growth and Keystone Positive Change to vote. Thursday is the deadline for CQS Natural Resources and Henderson Opportunities Trust.
“I am very pleased that Herald shareholders overwhelmingly rejected Saba’s unwelcome proposals” said Karen Brade, chair of Keystone Positive Change, on hearing the news of the Herald vote. “This is good news, but it has no direct bearing on the outcome for Keystone. Keystone shareholders still must come out in their entirety, every one of them, and vote against Saba’s resolutions. Only a massive turnout of Keystone shareholders voting against will stop Saba seizing control of the company.”
Regulatory concerns over governance and reporting
Analysts in the City raised worries that Saba’s campaign to puts its own directors on the boards of the targeted funds risked compromising the standards expected of independent governance for investment trusts. Institutional investors more widely have been campaigning hard for over a decade now to improve governance at the board level, something which Saba’s plans could undermine.
There are also concerns that communications between the UK’s larger retail investing platforms and the shareholders in these trusts has been inadequate, and that more should be done.
The Financial Conduct Authority (FCA) has responded to concerns raised by the AIC about the protection of retail shareholders’ interests following the action by Saba Capital.
The AIC’s Richard Stone said:
“The FCA has confirmed to us that they have written to the platforms to understand how they have engaged with customers on the Saba vote. We welcome this intervention by the FCA and their support for retail investors to engage with their investments. But we need to remove the barriers which prevent retail investors voting. Voting must be straightforward and easy for everyone. Saba’s action has highlighted that this is critical if retail investors are to have a say on what happens to their investment trust.”
Stone added that it was “reassuring that the FCA has reaffirmed their powers to investigate and take action if they see evidence of a breach of the Listing Rules.”
The FCA said that the Listing Rules aim to ensure investment trust boards can act independently from the manager. Investors must receive adequate information on the investment policy and the FCA and shareholders must approve any material changes to the company’s investment policy. While at this stage Saba will be focused on winning the key votes it has pushed for, it could find replacing the managers a tougher prospect if the regulator weighs in.
