Investors must end this brutal attack on trusts by US activist, says ALEX BRUMMER

Investment trusts have a long and occasionally checkered history.

The best – such as the Scottish Mortgage Investment Trust (SMIT) and the Rothschild Investment Trust (RIT) – have done brilliant work for retail investors over decades.

But they often trade at deep discounts to their underlying assets.

These discounts reflect a dissonance with London Stock Exchange shares in general, inconsistent performance and a view that they are often managed for the benefit of insiders, fund management groups and executives, rather than investors. .

One of my first encounters with the investment trust industry, as a young financial journalist, dates back half a century, with the implosion of the investment empire run by the former mayor of London, Sir Denys Lowson.

An investigation by The Investors’ Chronicle established that the Lowson family of investment trusts was nothing more than a large Ponzi scheme in which several trusts were invested in each other and the underlying assets were virtually non-existent.

The stables have long been cleaned out and generally high standards of governance prevail at the seven publicly traded investment funds targeted by US hedge fund Saba Capital.

Saba is led by Wall Street activist Boaz Weinstein, who has taken large strategic stakes.

Adopting tactics common in the United States, Weinstein is calling for a series of shareholder meetings with the goal of ousting existing management, replacing them with his own nominees and assuming the management role and the fees that come with it.

There are several precedents for this type of raids. New York-based Edward Bramson, through his Sherborne vehicle, took control of Foreign & Colonial, the country’s oldest investment trust, in 2011.

It went on to dismantle Electra in 2014. That was something of a tragedy for UK plc, as the trust was closely invested in cutting-edge UK technologies.

A year later, Elliott Advisors boarded and conquered Alliance Trust. Elliott’s activism came in handy for investors in SMIT when a share buyback occurred, helping to narrow the discount.

My conversations with Karen Brade, chair of the £149m Keystone Positive Change, a fund focused on sustainable technologies around the world, suggest that Saba is complicated to deal with.

The trust acted to meet Saba’s demand for a cash outflow, but it made no difference and the attacks continued.

In an uncompromising response, Brade says she is “horrified” by the way Saba is trampling on governance and retail investors.

She and other trust bosses fear retail investors will not exercise their voting rights, leaving Saba to plunder investment legacies.

There has been a tendency among fund managers to run investment trusts as fiefdoms. Boards of directors are made up of a small group of directors who are known quantities.

Years ago, I was interviewed to become a non-executive of a well-established trust. Despite having promised to refrain from any discussion of the trust involved in these pages, it was decided, after due diligence, that this was not a good idea.

Later, my proponent informed me that some of my opinions (such as those against foreign acquisitions) did not add up.

You can understand why retail investors might be nervous about investment trusts.

When disgraced fund manager Neil Woodford launched his Patient Capital Trust in June 2018, retail investors, taking a long-term view, rushed to seize the opportunity to get on the ground floor of a trust that was buying new pharmaceutical, biotechnology, fintech and other cutting-edge companies. activities.

When the value of Woodford’s flagship Equity Income Fund plummeted, he used Patient Capital as a dumping ground for illiquid holdings.

The trust was “rescued” by Schroders and renamed the UK Public Private Trust. The abysmal performance continues. The shares are at 20p against a launch price of £1 and Schroders is reportedly preparing to liquidate.

Some trusts among the Saba seven, valued at £3.4bn, have outperformed the market and tried to fix the problems after receiving Saba’s attention. All trusts involved should examine their board structure, cost management and performance.

Weinstein’s attempt to insert the same group of directors into the boards of all seven trusts and displace existing managers is morally wrong, incestuous, and should be unacceptable to regulators.

Institutional and retail investors must end the attack.