Just before Christmas, the US activist investor Saba started troubling seven London listed investment trusts. The details are widely available elsewhere, including some from my fund colleagues last week.
The trusts in question are all equity funds of some kind and the short version is Saba appears to want to replace the boards of all seven, and from there change the investment mandates to start investing in other trusts on discounts.
Saba organised a call last week to lay out what they were doing and why, and I listened in with interest, once they got started.
The founder of Saba seems to be a suitably passionate and combative sounding chap called Boaz Weinstein, although having said that, these qualities are not obligatory. There are different ways of doing most things. I once found myself in a room with Chris Hohn of TCI fame when he was activist investing ABN Amro.
He had said publicly he was going to the AGM, so I went as well, along with a handful of others. I was trying to work out which one of the small group was Chris Hohn as I didn’t know what he looked like. At the Q&A he stood up and announced himself before asking a question. I was expecting some forthright, Jeremy Paxman-like skewering of the board, but he nervously asked a question which I don’t remember, the board said they had no idea what he was talking about and he slightly sheepishly sat back down again.
Anyway, Mr Weinstein had a lot to say about how poor he thinks some of the funds are, trading on persistent discounts, underperforming their benchmarks, apathetic boards not doing much about it. He also had a lot to say about the response of some of the trusts to what he is doing, and to him personally.
Again, plenty of other people have spent the last few days and weeks picking apart what Saba have been saying. I don’t feel I need to add a lot and don’t especially want to. I agreed with some of it and disagreed with parts.
Before Hawksmoor, I spent seven years working at a UK based investment trust activist investor. They were founded in the mid-1990s, thirty or so years ago. Saba are very far from the first people to do this sort of thing, although the dramatic appearance in large size in seven trusts all at the same time is different.
From the late 1990s through to about 2021 the trend in UK listed investment trust discounts was narrower, give or take two very large blips in the GFC and Covid. Discounts went from an average of about 15% up to briefly touching 0%. Through 2022 and early 2023, they widened very sharply and have now hovered either side of 15% for some time. This partly creates the opportunity Saba are currently investigating.
One thing I would say from personal experience is that activist investors don’t care about winning the argument as much as you might think. They win some and lose some and care a lot more about the share price going up. Saba already won that battle before the trusts knew they were in a fight.
Arguing with them in the Financial Times several weeks later is a distraction. They get themselves into these very public arguments. It’s part of the idea and I guess it is somewhat entertaining in a soap opera or reality TV way, if you like that kind of thing.
But it is not of course actual entertainment and I think it is important to not get too caught up in the back and forth of it all. It doesn’t matter if I like Mr Weinstein or not – I have never met him. It certainly doesn’t matter where he lives.
Hawksmoor is voting against these proposals because we think it is in the interests of our clients to do so.
In one of the funds they have promised a 100% cash exit at 1% less than NAV, but have made no specific promises on the size of cash exits from the other six. The precedent from Saba’s history of doing similar things in the US suggests a lot less than 100%. Their reluctance to put a number on it also seems worth noticing.
Okay, let’s rehash one of the Saba arguments on this point. I understand and agree with the line that some of these funds also did not provide exits when the current managers took over, but the point here is the argument doesn’t matter.
It’s true that there are inconsistencies and standards could be higher. But the real issue is Hawksmoor can’t reasonably vote clients into another situation with no exit because exits were not provided in the past. This is what I mean about it being a distraction. Saba characterises the board as bad actors but provides an undefined exit option of their own. Saba votes on behalf of their own clients and presumably knows this.
The mandate change has also not really been made clear, beyond generally into investment trust discounts. The Association of Investment Companies (AIC) has written to the FCA raising potential regulatory issues. There are board governance issues. Saba have said they will improve the board structure if they win the vote (which they have done in the past), but we would be taking that on trust. I would see it as a bold move to vote your clients into the unknown like this.
We do care about the health of the wider investment trust sector, which has not been good over the last few years for a number of reasons, but I don’t see these Saba votes as a fight, or a cause in themselves. We’re not picking a side; we are looking for the best outcome. If Saba came back with something we thought was in our client’s interests, we would vote with them just the same.
If we did want to talk about the principle of the thing, then in my view, Saba don’t need to win all the votes to effect change across the sector – they have already done that as well. If any trust with liquid assets, sitting on a discount and questionable performance is not already looking over their shoulder then they really are asleep at the wheel. Saba could even win none at all and they would come away with a presumably profitable trade and a change in mindset.
Mr Weinstein sounds like he can probably look after himself, but the activist process is time consuming and draining. My guess for what it is worth is that they will win some of the seven and lose some. They will get their listed vehicle to start buying discounted investment trusts one way or another.
I would wish them well in that and we will look at it when the time comes. We might even be able to pick it up at a discount.
Robert Fullerton – Senior Research Analyst
FPC25259
All charts and data sourced from FactSet
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