As anticipated, US hedge fund Saba Capital has said it intends to requisition four general meetings at further UK investment trusts, namely at CQS Natural Resources Growth & Income, The European Smaller Companies Trust, Middlefield Canadian Income Trust and the Schroder UK Mid Cap Fund.
The hedge fund has developed an activist strategy that has seen it take advantage of near record discounts in the price of investment trusts to seek to force through board level changes. Speaking at a conference in London this week, Saba Capital’s founder Boaz Weinstein, was highly critical of the investment trust structure, and argued that the investment trusts Saba was targeting should become open-ended.
Saba Capital has said that its activist strategy, which is being used to target the investment trusts, has seen record inflows from investors since the campaign began.
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said:
“We’ve seen Saba’s proposals decisively rejected at six investment trusts. This demonstrates shareholders value the investment trust structure which has delivered strong long-term performance and the independent oversight of boards.”
Significant shift in strategy by Saba
The requisition notices that Saba has said it intends to deliver to these four investment trusts or the detailed proposals have yet to be published. It is therefore unclear how the hedge fund intends to provide a conversion or rollover into an open-ended vehicle with the same manager and strategy.
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This marks a significant shift in strategy by Saba following the defeat of its original proposals. Once published, it is critical for shareholders to examine these proposals and their boards’ responses and vote at any meetings.
The US hedge fund has built stakes in investment trusts and put forward uncomfortable proposals, which could change the course of the sector.
Patterns are emerging. By capitalising on equity trust discounts, Saba is able to agitate for board changes, potentially leading to a change in manager and strategy, as well as liquidity opportunities for shareholders. If we look beyond the seven trusts currently facing general meetings, there are c.17 names with publicly disclosable material Saba holdings.
“We need to ensure that all shareholders have the opportunity to vote on the future of their trust,” the AIC’s Stone said. “That’s why we have recently launched our ‘My share, my vote’ campaign to change the Companies Act so that nominees, including platforms, must pass on voting rights and information to their customers.”
Closed-ended investment trust structure works
“Investment trusts are a UK success story. Over the last ten years investment trusts have outperformed open-ended funds in eleven out of fifteen sectors.
The AIC argues that the closed-ended investment trust structure works well for investing in smaller or less liquid companies. Governed by independent boards acting in the interests of all shareholders, the closed-end structure has a number of significant advantages. These include the ability to be fully invested, to invest in less liquid assets, to borrow and to smooth income. These all can deliver superior performance relative to open-ended funds and consistent and rising income over long periods.
“Boards need to be more proactive about managing discounts, providing liquidity, stimulating demand and demonstrating a focus on shareholder returns,” Deutsche Numis Securities said in a note last month. “To “keep the wolf from the door” discounts need to be kept relatively narrow, which may require a wider range of measures than it did historically.”
