Boaz Weinstein slammed the ‘jingoism’ of the British financial press and City figures earlier this week as he laid on an unusual but highly consequential charm offensive.
The chief executive of hedge fund Saba Capital was hoping to win over seven different groups of investment trust shareholders ahead of a series of crunch votes that will ultimately define the future of Britain’s more than 150-year-old sector.
Saba’s bombshell intervention in December, though months in the making, has sparked an investment trust industry outcry after boards and management were caught off guard, and found themselves suddenly fighting for their jobs.
Commenters have depicted Weinstein as ‘some American, taking pounds and bringing it back to the US’, he told the audience of one of the more bizarre webinars I have attended, on Tuesday, as he tore into his investment trust opponents’ track records and conduct.
Both sides might be forgiven for being somewhat melodramatic, there’s a lot at stake.
City criticism of Saba paints the picture of an existential crisis facing the investment trust sector after several years fighting spotty performance and discounts to net asset value that in October 2023 widened to levels not seen since the 2008 collapse.
As investment trusts are what is known as closed ended, with a limited number of shares traded on the stock exchange, their share price can fall to a discount to the sum of what they hold, aka their net asset value.
Charm offensive: Boaz Weinstein outlined his strategy as Saba prepares for seven crunch vote
Saba claims it is a ‘white knight’ riding in to rescue beleagured small investors in investment trusts. Unsurprisingly, the managers and the boards of directors who run the trusts don’t agree.
The chief executive of Janus Henderson, which manages two of the trusts targeted by Saba, Ali Dibadj reportedly warned an audience of professional investors this week that an ‘inconsequentially small’ and ‘very aggressive’ hedge fund was ‘betting on complacency’ to achieve an asset grab.
This complacency could be a handy weapon for Saba. Figures from Peel Hunt show abysmal turnout for shareholder votes, with an average of just 35 per cent of share votes cast in the UK market, suggesting Saba’s mammoth stakes in each trust may be enough to guarantee its wishes.
The date that Saba’s proposals will be put to a shareholder vote at each investment company
But criticism of Saba has not been without merit.
Saba accepts its fees are higher, and to most it seems obvious that its audacious takeover plans are motivated by self-interest rather than some grand altruistic crusade to boost the UK market – this is a hedge fund after all.
It also appears to lack the Warren Buffett-like track record needed to justify its accusations of being much better placed to deliver returns that claimed widespread incompetence on the part of boards and management.
Governance may prove the most important red flag. Saba’s plan to replace entire boards with one of its employees and just one nominee connected to the hedge fund will surely raise eyebrows at the Financial Conduct Authority.
Analysts at Investec say Saba’s proposals show ‘a distinct lack of understanding, bordering on contempt’ of the sector’s corporate governance code, and could easily fall foul of the stock market’s listing rules and even the FCA’s diversity and inclusion targets.
Board members I have spoken to have expressed disbelief at how Saba has conducted itself both publicly and privately.
But perhaps investors aren’t the only ones guilty of complacency.
Fund bosses have pointed to regulatory pressures, fewer analysts covering the sector and higher gilt yields as driving their recent woes.
Critics, meanwhile, suggest boards and management have been slow to readapt to a world of non-zero interest rates, and should be more proactive in tackling discounts when they occur.
Saba’s plan isn’t that radical
Fear not, Weinstein tells us, Saba is the ‘white knight’ of the UK market, here to save us from incompetence and poor returns. It will pull these trusts together and create a vehicle to buy into other undervalued trusts.
But, in some respects, there is nothing particularly novel in Saba’s approach.
‘Trust-of-trust’ vehicles have existed for some time – take Peter Hewitt’s CT Global Managed Portfolio Trust, for example.
Its shares are down by around 7 per cent over the last three years, reflecting the woes facing the wider market. The trust, albeit managing less firepower than Saba can offer, has never claimed to be the saviour of the UK market.
Equally, buying trusts on the cheap because you think a heavy discount will narrow is hardly a revolutionary strategy.
Saba insists it will simply encourage the trusts it buys stakes in to engage in ‘shareholder friendly’ activity like share buybacks to narrow discounts, thereby benefiting not just themselves but all UK investment trust investors – thanks Boaz!
This is an activists’ market now
Some investment trusts have already been utilising buybacks in efforts to fight discounts over the last three years, with mixed results.
Saba points to the ‘£3.9billion’ it plans to plough into UK assets after merging the funds – seemingly a much needed chunk of firepower to revitalise discount-laden funds.
But that figure is dependent on the hedge fund getting its way in seven separate shareholder votes, investors then remaining invested and zero loss of value as non-UK holdings are sold down.
Saba may then not even merge all seven of the trusts, it hasn’t decided yet. Weinstein assures us this decision is being diligently mulled over.
What happens next for investment trusts?
Decisions made by Saba, shareholders and regulators will be closely watched in the coming weeks, but change is now inevitable for the investment trust sector.
Saba holds stakes in 24 London-listed trusts in total, and it no doubt intends to agitate elsewhere later on – the upcoming votes, scheduled from 22 January to 5 February, will likely not be the last.
Investment trust boards will have to respond, whether they have been targeted by Saba or not, as the rules of the game have shifted. This is an activists’ market now.
It’s easier said than done it may be, but they will have to find a way of being more active in closing discounts and boosting shareholders returns.
In this environment, other major players will have to step into the market, potentially with their own ideas for the future of the sector.
Who knows, perhaps us lowly DIY investors will become less complacent and start to embrace our very small role as ‘asset owners’.
Regulators, in turn, may have to reassess the rulebook.
Whether all this will ultimately be to the benefit of the UK market and its investors remains to be seen, but change is coming.
The Rubicon has been crossed, the die has been cast and the world – for investment trusts at least – can never be the same again.
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