US hedge fund Saba Capital has mounted a bid to change the boards of seven UK-listed investment trusts. Investors in these trusts are now approaching the voting deadlines at which the fates of these trust boards are to be determined.
Not only that, but Saba’s campaign is also causing many within the City of London to question the ethics of the coup.
Saba Capital has highlighted that if the new directors it has proposed as part of its process are appointed, they will ‘transparently assess all go-forward options’, including the termination of the trusts’ current management agreements, replacing their current investment managers and refocusing their investment mandates on purchasing and/or merging with other discounted trusts.
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Not only that, but if we look beyond the seven trusts currently facing general meetings, there are c.17 names with publicly disclosable, material Saba holdings.
“We believe that the proposed new boards and Saba’s appointment as the new investment manager would result in a corporate governance structure that does not fulfil the investment company industry’s best practices and Financial Conduct Authority’s listing rules,” said Edison Investment Research in a note to investors this week.
The first voting deadlines are now upon us if retail investors wish to vote using shares they hold through UK investment platforms. The platforms have set a deadline of today – 17 January – for the Herald Investment Trust. Baillie Gifford US Growth and Keystone Positive Change have deadlines of 29 January.
Note that AJ Bell clients must vote by 29 January for Henderson Opportunities Trust. A 30 January deadline applies on the other major investment platforms for Henderson Opportunities.
- Baillie Gifford US Growth – 29 January voting deadline
- CQS Natural Resources Growth & Income
- Edinburgh Worldwide
- European Smaller Companies Trust
- Henderson Opportunities Trust – voting by 29 January (on AJ Bell) or 30 January (other platforms)
- Herald Investment Trust – voting by 17th January
- Keystone Positive Change – 29 January voting deadline
Insufficient details create significant uncertainty
Investor activism may be beneficial for the shareholders of investment trusts. It encourages the trusts’ boards to intensify their efforts to maximise shareholder total returns and shareholder dialogue.
“We believe that Saba’s intention to use the targeted trusts as a platform to build a UK discount arbitrage franchise goes beyond pure investor activism,” Edison said.
“Saba presents a biased narrative to achieve its objectives and its recent proposals lack the necessary details to make an informed decision to vote in favour of them.”
This includes details related to:
- The significant, immediate liquidity events (e.g. tender offers and/or buybacks) at NAV to be offered to shareholders. Including Saba’s approach to the less liquid public small-cap and private holdings of these trusts;
- The new investment mandate of buying/merging with discounted trusts and the plan for transitioning the trusts’ portfolio; and
- Measures to protect the rights of other shareholders. Most notably the process for appointing new independent board members beyond the directors proposed in Saba’s open letter.
Retail shareholders’ interests compromised
The Association of Investment Companies (AIC) has written to the Financial Conduct Authority (FCA) to raise concerns about the protection of retail shareholders’ interests.
Richard Stone, Chief Executive of the AIC, said: “Following Saba’s action, we are concerned that the current regulations do not protect the interests of retail shareholders. Saba is targeting investment trusts with a high percentage of retail investors, so it’s vital they have their say on the activist’s radical proposals to replace the board, change the investment strategy and become the investment manager. We are relying on platforms’ support to get this information out to their customers and encourage them to vote. Thankfully they have been broadly supportive of our call for action.”
The AIC said that with so much at stake, the regulator can’t just rely on people doing the right thing.
“Platforms have important obligations under the Consumer Duty to support their customers’ understanding of Saba’s proposals and any others in the future,” Stone said. “We believe investors should be automatically opted in to receive communications on corporate actions. When significant changes to an investment trust are proposed, platforms should actively contact their clients to encourage voting. We want voting to be accessible and made clear and simple for all customers.”
The AIC also said that the FCA needs to urgently explain its views on directorial independence under the Saba proposals. If Saba wins the vote and is proposed as manager, how will potential conflicts of interest be managed?
“The FCA must review the scope of board independence in the Listing Rules,” Stone said. “Saba’s campaign raises questions about the independence rules if they permit a significant shareholder, who may have a conflict of interest, to effectively select board members – particularly when those board members may go on to appoint that shareholder as the asset manager.”
Should this be the outcome of Saba Capital’s campaign, then it would certainly make a mockery of current UK fund governance rules.
“Of course, with consumer duty, retail platforms are supposed to act in a way that will help lead retail punters to get ‘good outcomes’,” observed Frostrow Capital in a note issued this week. “I would again humbly suggest that chucking out a couple of emails to your clients and asking them to consider voting here would not necessarily be a sufficient discharge of your responsibilities.
“Again, if I may ask you to think ahead to the land of “what if” Saba wins here. The PR will be awful, absolutely awful, and the slide rule over this and [the subsequent] inquisition will be significant and prolonged for market participants.”
