Saba Capital campaign – Your vote matters

Shareholders of seven UK-listed investment trusts face a crucial vote during the upcoming general meetings. The trusts are Baillie Gifford US Growth Trust (USA), CQS Natural Resources Growth & Income (CYN), Edinburgh Worldwide (EWI), The European Smaller Companies Trust (ESCT), Keystone Positive Change Investment Trust (KPC), Henderson Opportunities Trust (HOT) and Herald Investment Trust (HRI). Their shareholders need to either approve or reject the agenda pursued by US hedge fund Saba Capital Management, which has built sizeable stakes of c 20–30% in these trusts in recent months, mostly by using a leveraged strategy via total return swaps. We recommend that investors carefully consider Saba’s radical proposals to oust the existing boards, replace them with new directors proposed by Saba and take over the management of the assets. Saba will likely favour a plain opportunistic arbitrage strategy to exploit the discounts to NAV among UK-listed investment trusts (by replicating the strategy of Saba Closed-End Funds ETF, ticker: CEFS), coupled with growing its own assets under management (AUM) and fee income, over providing shareholders with a truly differentiated value proposition tailored to each of these trusts.

Written by

Milosz Papst

Director of Content, Investment Trusts

Risks to corporate governance

Saba highlighted that if the new directors it has proposed 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. 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, discussed further below.

Insufficient details create significant uncertainty

Investor activism may be beneficial for the shareholders of investment trusts as it encourages the trusts’ boards to intensify their efforts to maximise shareholder total returns and shareholder dialogue. However, 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. 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: 1) the significant, immediate liquidity events (eg 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; 2) the new investment mandate of buying/merging with discounted trusts and the plan for transitioning the trusts’ portfolio; and 3) 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.

We believe it is important that shareholders cast their vote during the upcoming general meetings to actively shape the future of the trusts they are invested in. Those who hold their investments on platforms can find useful details on how to vote on the AIC’s website.

Click here to read more.

16 January 2025

Equities

Equities by Sector

Sectors

Thematics

Latest