The often sleepy world of UK closed-ended investment trusts has been proven to be anything but over recent months as New York hedge fund and activist investor Saba Capital parked its tanks on the lawns of the boards of a series of investment trusts. Of course, this is not the first time that activist investors have had investment trusts in their crosshairs. Arbitrage activity frequently coincides with periods when such investment vehicles trade at significant discounts over a prolonged period. What is unusual about the Saba saga is both the scope of the approach, with positions taken in upward of 20 trusts, and its concerted aggressive nature.

Boaz Weinstein, Saba’s CEO, has been outspoken in his assault on some of these trusts, requisitioning general meetings to motion a series of demands.  Initial proposals were that shareholders should vote to replace non-executive board members with Saba’s own nominees, sack the incumbent investment managers and back new investment policies, as dictated by Saba.  The suggestion is that the boards have demonstrated a dereliction of their fiduciary duty by failing to hold investment managers to account for disappointing three-year performance and allowing persistently wide or widening of discounts to damage investor returns.

Restructure Scrutiny

Despite this vociferous campaign, Saba have been less than transparent about their planned restructuring of areas such as fees and investment strategy and exit options for investors.  Their plans to crown Saba appointees including Saba employees as new non-executive directors would in no way amount to an independent board, a valuable feature of the investment trust sector, and the performance of Saba’s own managed funds has been less than stellar.  Some might argue that Saba planned to exploit investor apathy around voting to hoover up assets on the cheap and then to amalgamate into a single investment vehicle from which they can draw fees – hardly in the best interests of the rank and file of investment trust shareholders.  Nonetheless, it is always important that the investment industry stands up to scrutiny – after all, it has been entrusted with the savings, and therefore the financial security, of hundreds of thousands of individuals.  Some level of introspection is therefore appropriate.     

Discounts Question

When it comes to the vexed question of discounts, it is true that the board can play a valuable role in addressing them, however, discounts are often symptomatic of issues beyond the board’s control and that of the appointed investment manager. They are a result of investor demand, and when overall sentiment is weak towards a trust, the assets in which it is invested (or not invested) or even its domicile, its discount will naturally widen, regardless of the performance of an investment manager. Moreover, the industry-wide issue of cost disclosures has made the investment trust sector as a whole look less appealing than its open-ended counterpart.  

Shareholders Reaction

At the time of writing shareholders have resoundingly rejected Saba’s overtures. Saba may have lost this first battle, but it is evident that they do not consider the war over.   This is a dynamic situation and Saba have demonstrated that it is ready to pivot rapidly to meet its desired outcomes. The longer-term impact of Saba’s intervention will hopefully be a greater focus by investment trust boards on maximising investor share price total returns through better capital allocation decisions, more aggressive discount control mechanisms and a greater emphasis on returning capital to investors where it is in their best interests.

Conclusion

The array of investment options for investors has become increasingly varied, led by the meteoric rise of passive solutions, and it would be fair to say that currently there are too many sub-scale and undifferentiated investment trusts. Boards must therefore be much more proactive to utilise all available options to create differentiated, alpha rich, bigger, more liquid and cheaper investment vehicles that trade closer to NAV and that are ultimately a far more attractive option for investor capital. If this is Saba’s legacy, then the future may be brighter for this storied, highly adaptable, resilient and successful British institution.     

Square Mile Investing Consulting are a market leading and independent research house, with unfettered coverage of c.400 open ended and close ended vehicles across a wide array of asset classes including active and passive strategies.