I’m very hopeful [Saba's campaign will] improve the industry, which needed a damn good shaking down. It should now see shareholders in a better position. I think boards will pay better attention to capital allocation.
We also think quite a number of other shareholders will also be attracted by proposals to provide liquidity and potentially reduce discounts - therefore they will be supportive of the activists.1
It is a damning verdict on the trusts’ managers that their portfolios would be worth more if they were carved up and sold for parts. For Mr Weinstein, it also marks a failure of the trusts’ boards. They could have improved matters by ordering managers to sell some assets and use the proceeds to buy back shares at a price close to their NAV. Saba’s campaign has spurred several to do so; share prices have duly risen and discounts narrowed.
In reality, the control of investment trusts should be far more contested. Battling to stay in control will drive managers to improve returns, and to think a lot harder about what the next big opportunity might look like.
Saba has done the whole sector a big favour. The investment trusts need to remain dynamic, focused and innovative if they are to survive, and that is only going to happen if there is some form of punishment for failure.
[...] the deep discounts on 90 per cent of investment companies had persisted for so long that managers could be accused — with good reason — of failing to take any meaningful steps to narrow them through buybacks or tenders.
It cannot be right that a discount, however constant and invariable, be allowed to be seen as 'normal'. Imagine being told a 15% discount is about right two years after paying a 2% premium at IPO? Or not to worry because NAV returns will eventually render the 17% loss minimal? Why would I ever back an IPO?
For those trusts with portfolios of liquid assets, there is simply no excuse for persistent discounts. For such trusts, the discount is a sign that it may not be relevant or making best use of the structure.
The UK investment trust sector does need a shake up. Boards haven’t been careful enough about discounts. Some performance is absolutely appalling—three of the trusts Saba is after are down more than 40% over three years.
So yes, action is required. And yes, Saba’s arrival already has prompted a lot of action. Five of the 'miserable seven' (as Weinstein calls them) have adopted policies to close their discounts and return cash to investors. Other boards are scrambling to do the same.
For those stuck in these closed-end funds, Weinstein’s appearance is indeed good news.
It has been a massive wake-up call for the sector that has got far too complacent.
Captive fee income meant very little ever needed to be done to keep shareholders happy — where was the incentive? It’s been a good kick up the behind.
[A] number of shareholders have taken advantage of the increase in prices from Saba’s buying to sell in the market. We note that Saba has continued to buy since announcing its requisitions.2
Saba didn’t win the votes, but it hasn’t really lost either because the trusts’ discounts have tightened [since it started building stakes in them.]
Weinstein’s campaign style might not have done much for his reputation in the UK. But his investors don’t care about that. He made money.
We question boards’ proactivity around discounts. They’ve all dragged their feet a bit.
Weinstein is offering a faster solution than waiting for the sector to come good. He wants to merge the trusts he has targeted into an investment vehicle that would push others to squeeze their discounts by measures such as buybacks.
It would be a mistake to dismiss Weinstein solely as an opportunist. He has already shown more insight into investment trusts than other investors who have stayed away. Saba has also provoked boards that were satisfied just to complain at their plight into taking action. If money is now flowing out through buybacks, maybe some got bloated in the good years.
[…] since Saba has stopped purchasing shares, there has been a ‘stark’ widening of the discount, according to Crighton, which he argued could ‘edge wider’ if Saba loses the upcoming vote.
If Saba is able to liquidate a fund at close to net asset value, shareholders could well get cash worth more than where their trust’s shares have been trading. Having pocketed that gain, they could reinvest in, say, an index fund with a similar theme. Or they could go with Saba’s investment trust play. That’s a nice option.
Keystone Positive Change (KPC), Henderson Opportunities (HOT) and Edinburgh Worldwide (EWI) – other Saba targets – have woeful performance records and quite frankly deserve to be wound up.
Board composition is a mistake at too many trusts, populating their boards with weak box-tickers rather than key contributors to the company’s operations and direction.
Saba has received positive feedback for raising the issue of lack of investment from boards in their own trusts, with the activist investor noting their stake in trusts far outpaces the stakes held by their own boards.
The sector has been in rapid decline over the past few years, due to a combination of high interest rates, a lack of liquidity, and cost-disclosure regulations. While trusts still make up roughly a third of the FTSE 250 index, a flurry of mergers that started in 2023 has seen the sector shrink to 299 listed trusts – down by 28 — according to the Association of Investment Companies.
[Investment trusts'] shares should trade broadly in line with the net value of their assets (NAVs). But trust shares can fall out of favour, creating big gaps between share prices and NAVs, and leaving investors unable to cash out without leaving value behind.
Win or lose, Saba's battle looks likely to mean more pressure on trusts to improve their performance.
[I]t’s true that, by picking these fights and buying big stakes, [Weinstein] has done everybody a favour by closing valuation discounts in the seven trusts. His long-term impact across the sector may also be beneficial if he has put a rocket under boards and obliged them to be more active in closing discounts themselves via share buybacks.
All of the trusts have suffered from double digit gaps between their share price and the value of their underlying assets, while five have posted double digit underperformance to their benchmark indices over the last three years.
Douglas Brodie, Svetlana Vieteva, and Luke Ward, the Baillie Gifford managers running the £737m [EWI], admitted they have overseen ‘three years of testing shareholders’ patience with returns that haven’t been good enough’. They said the scale of the underperformance ‘hinted at systemic errors’ in their strategy.
[HRI] has not traded on a premium to its underlying assets any time in the past five years, and was a result of Saba’s ‘aggressive’ buying activity, according to analysts, as it attempted to increase its odds of winning the vote by holding a larger stake in the trust.
1 Stifel Research Department (2024) Saba requisitions General Meetings at seven trusts, Taylor Maritime, Downing Renewables, NB PE. London: Stifel, Nicolaus & Company, Inc.
2 Brown, C., Kelly, A. (2024) Seven in Saba’s Sights. London: J.P. Morgan Cazenove.