17th January 2025
The most talked about subject in the investment trust sector at the moment is Saba and the debate has become more vociferous since founder Boaz Weinstein’s ‘enthusiastic’ presentation yesterday (one press article called it a “rant”). For anyone involved in the sector that didn’t watch it live, it is actually quite refreshing in that it isn’t the sort of webinar we are used to, so you must watch the replay when it is released. With mostly anti-Saba rhetoric hitting the screens, we are seeking to offer a balanced view in this note.
As we have written and commented lots of times before, a big constituency of the sector had become complacent in recent years and had become vulnerable to attack from so-called activist or short-term investors like Saba. Failing to address persistent discounts caused by falling demand for the shares allows anyone to buy shares off those persistent sellers. By not addressing the imbalance of supply and demand sooner by attracting new long-term investors, buying back their own shares or considering consolidation (with an exit option) to increase scale and relevance, boards and managers are therefore in a weaker position to choose which shareholders jump on the register in place of those prepared to exit at a wide discount. Saba has therefore arguably only taken advantage of a situation caused by the trusts’ own making. If it wasn’t Saba, in a capitalist free market democracy someone else would have taken the opportunity. Indeed Weinstein pointed out that Keystone Positive Change’s top 15 shareholders have all been selling shares over the past 2 years and Saba has been aggressively buying. So we don’t have much sympathy when boards or managers or brokers trumpet how well loved their trust is when the movements in the register suggests otherwise. Similarly, recently adopted share buyback programmes, tender offers or continuation votes have only been installed since Saba came on the register. If those shareholder friendly measures had pre-dated Saba’s investment, those trusts may not be in the crosshairs now.
The big difference with Saba’s actions compared to other activists in the past is that they are not simply buying on wide discounts and ultimately selling on narrower discounts (in the market or by agitating for liquidity events). Their true intention, that only came to light fairly recently, is to seek to take over the mandate of some or all of the targeted investment trusts and use that vehicle to go after other failing or complacent investment trusts – a model they have employed in the US. This strategy, as far as we are aware, hasn’t been tried before in the UK. The conventional route to the UK investment trust sector is to either launch one from scratch which involves a lot of time, effort and cost to raise the required amount of capital ahead of an IPO, or to be part of a beauty parade and take over the mandate of an existing trust that is in need of reinvigoration or seeking a new direction. The main, and quite vociferous, arguments against Saba’s plan are that there is not enough detail about their proposed mandate, that the proposed level of corporate governance is substandard and there is a lack of clarity over the fees. Weinstein addressed this in the presentation and went some way to lay out future plans, which included appointing the required number of independent directors if they are successful in taking over one or more of the trusts in question, although the opposition remains sceptical.
The other topic that is garnering much comment is shareholder apathy when it comes to voting. Perhaps Saba is taking advantage of the high percentage of retail investor ownership of the 7 requisitioned trusts and the fact that only votes cast are counted (meaning a minority shareholder can effectively control a trust if turnout is sufficiently low). But again they are only exploiting a situation that has arisen by others’ making. Many investment trust boards and managers have lauded the rise of retail on their registers in recent years and have arguably benefitted, for example when continuation votes have passed on extremely low turnouts. We believe it is therefore hypocritical to now issue rallying cries to the public and platforms calling everyone to vote against Saba in this situation when arguably retail investors should have been engaged with far sooner and especially as their percentage ownership increased. We agree that there are flaws in some of Saba’s arguments and plans but equally there are flaws in the defences put up by the boards of the ‘Miserable 7’ (Saba’s term not ours). Therefore, we strongly believe that every shareholder should vote regardless of how complicated it might be via platforms or proxies. Of course shareholders should have as much information as possible to aid their decision which perhaps is lacking so soon before the upcoming deadlines. Finally, there is an argument that, under Consumer Duty, platforms could be doing more to both inform their customers and encourage them to vote.
Despite Weinstein’s refreshing and impassioned ‘rant’ in the presentation and the numerous responses since, big and important questions remain. Such as what happens if Saba does win a simple majority of those these votes? What happens if they lose? Will those discounts that have narrowed in recent months widen out? But one thing is clear (to us at least); the rest of the investment trust sector needs to take note and take steps to avoid being the next target of Saba or someone else. The profits Saba has made from narrowing the discounts on its investments will not go unnoticed, so there will be others, potentially other ‘nasty US hedge funds’ that will come into the sector. So regardless of one’s view of Saba’s motives and methods, this is a massive wake up call to the sector. To all boards, brokers and managers – take proactive measures to improve shareholder returns and liquidity or risk having those decisions taken out of your hands. To investors – this is a fantastic time to be investing, not retrenching, in the sector while discounts remain at their widest levels for decades. As regular readers will know, we are huge fans of the sector. Investment trusts democratise access to funds and assets that would otherwise only be accessible to the very wealthiest in society. The sector channels capital to vital areas of the UK economy and accelerates technological innovation and improvements in our social and environmental well-being. It is time all stakeholders encouraged new investors to the sector so that discounts may narrow from rising demand, rather than falling supply, ideally.
Daniel Lockyer – Senior Fund Manager
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