Activist Saba launches a coup against the board of directors and management of seven investment funds listed in London

An activist investor hopes to take control of seven underperforming London-listed investment funds after urging shareholders on Wednesday to sack their respective boards.

Saba Capital published an open letter to shareholders of the seven trusts, asking them to vote to fire entire boards of directors and replace them with “new, highly qualified candidates,” including the hedge fund’s own executives.

Saba has acquired stakes of between 19 and 29 percent in each of the trusts, which have suffered huge discounts to their net asset value as investors have rejected their shares.

The affected trusts are Baillie Gifford US Growth, CQS Natural Resources Growth and Income, Edinburgh around the world, European small businesses, Henderson Opportunities, Herald Investment Trust and Key positive change.

Targeting trusts at deep discounts to NAV is a key part of Saba’s investment strategy, from which it hopes to build an ETF targeting London-listed investment companies.

Boaz Weinstein, founder and chief investment officer of Saba Capital, told shareholders of each trust that the “inability of its current investment manager and board of directors to consider the gap between each trust’s trading price and net asset value “has destroyed significant value for shareholders.”

He noted that each trust has seen its discount to net asset value narrow significantly over the past six months, although Weinstein attributes this to the impact of Saba increasing its stake.

“Without such demand from buyers or the prospect of active steps being taken to improve returns for shareholders, there is a risk that trust share prices will fall and discounts will rise again if we are not successful in our attempt to reconstitute the boards of directors of the seven Trusts,’ he added.

Saba has asked each trust to call a general meeting “as soon as possible” for shareholders to vote on the proposal “in early February” next year.

He expects Weinstein to be named to the board of Baillie Gifford US Growth, while Saba investment trusts CEO Paul Kazarian would join the board of the other six.

Saba has also appointed seven independent directors, each of whom would join one of the boards.

Weinstein said: “The managers of the trusts and their directors have failed shareholders.” The performance demonstrates that they have not taken sufficient steps to resolve the Trusts’ structural problems, depriving shareholders of superior returns.

“While multiple mechanisms exist to reduce these persistent discounts, inaction has been the consistent course of current leadership.”

‘By fully reconstituting the trusts’ boards, we believe we can unlock greater value for shareholders and address the long-term structural issues that have crippled the trusts’ return potential under current leadership.

“Each of the director candidates shares a deep commitment to improving shareholder returns and putting their interests before their own.”

An ‘obvious flaw’ in Saba’s strategy?

Baillie Gifford, who runs US Growth, Edinburgh Worldwide and Keystone Positive Change, acknowledged the letter but had no further comment.

This is Money has also contacted Janus Henderson, director of European Smaller Companies and Henderson, and Herald Investment Management for comment.

Below, Matthew Read, senior analyst at investment trust specialist Quoted Data, explains why he sees “an obvious flaw” in Saba’s strategy.

“Saba wants shareholders to replace the current boards of directors and deliver on its plan to “rapidly deliver substantial liquidity and long-term profitability to all shareholders.”

‘However, those two are often mutually incompatible, particularly for some of the funds it targets where the underlying holdings are less liquid.

‘Herald (is) the obvious example as it is a large fund with a huge tail of small illiquid appointment-traded positions that could take years to liquidate and would likely move the market against it on many of them, particularly once the market considers you a forced seller.

‘The call for substantial liquidity also ignores the unlisted positions of trusts such as EWI and USA.

“These are long-term investments and, for some, the benefits can be substantial, as recently illustrated by the spectacular success of SpaceX. Saba also appears to be targeting trusts facing cyclical challenges, such as CQS Natural Resources.

“This and other challenges we highlighted above have long made us feel that Saba does not really understand some of the funds it invests in. It is well documented that Saba has had success with similar attacks in the US, but in the UK. The closed-end fund market is fundamentally different.

‘Corporate governance standards are higher and returns have generally been better, so this type of approach makes less sense, particularly now that progress has been made in solving problems such as cost disclosure, so discounts are now being reduced.

“It seems to us that their approach is very short-term in nature and this highlights a long-standing problem: because many retail investors hold their holdings through platforms and do not tend to vote, large professional investors get a disproportionate number of votes. .

“This can lead to results that do not benefit all shareholders, so we believe it is even more important that shareholders of these funds ensure their interests are protected and get out to vote.”