Why one US hedge fund is taking aim at the UK’s biggest investment trusts
A shake up could be coming for the UK’s investment trust industry after US hedge fund Saba Capital launched a campaign to topple the boards of seven different companies yesterday.
“Like the Ghost of Christmas Past, Saba has descended upon the investment trust industry, urging self-reflection,” said Shavar Halberstadt, analyst at Winterflood.
There have been rumblings of activist activity in the sector for some time due to years of sluggish performance and a stubborn gap between the book value of trusts’ assets and the prices their shares trade at.
But while there have been sporadic cases of US investors putting pressure on the sector, action on the scale of Saba’s campaign is unprecedented.
The seven trusts being targeted are: Baillie Gifford US Growth Trust, CQS Natural Resources Growth & Income, Edinburgh Worldwide Investment Trust, European Smaller Companies Trust, Henderson Opportunities Trust, Herald Investment Trust and Keystone Positive Change Investment Trust.
Currently, Saba controls between 19 to 29 per cent of the shares of each of the vehicles.
The New York-based hedge fund has been stalking the sector for some time but, despite attempts by various boards and managers attempting to engage, the investor is said to have kept its cards close to its chest.
“We have been surprised that Saba hasn’t pressed the requisition button on a number of trusts where they reached the 10 per cent threshold to call a meeting months ago,” said Stifel analyst Iain Scouller.
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.
Saba’s proposals are to appoint two of its own directors on each board of the seven trusts. Partner Paul Kazarian has been tabled as a candidate on all the boards bar Baillie Gifford US Growth, where founder and CIO of Saba, Boaz Weinstein, has been proposed as the candidate.
Alongside the board shake-up, the activist investor has proposed a range of ideas to boost the performance of the vehicles, stretching from appointing the hedge fund itself as the new investment manager to re-focusing their mandates on combining with other trusts.
One problem for the boards is that many of these trusts have a large number of private client investors, who often don’t turn up to vote. Equity trusts frequently have turnouts of around 25 to 30 per cent, meaning the hedge fund may be able to push through the election of its board candidates with little resistance.
However, analysts agreed that there will be “significant pushback” to Saba themselves taking over as manager of the trusts.
“We think many of the management houses and individual portfolio managers have been chosen [for their] expertise in these geographic sectors and, in many cases, good long-term track records,” said Scouller.
“We think Saba will need to demonstrate they have experienced managers with strong track records in these sectors if they hope to become the manager.”
Why did the hedge fund pick these trusts?
Scouller said it was “surprising” that the trusts targeted so far had been equity-focused vehicles with discounts at about 10 per cent, as opposed to trusts that focus on alternative assets.
Alternative asset-focused trusts, like renewable and private equity investors, typically have much more substantial discounts, sometimes as high as 40 per cent.
However, Scouller reasoned that equity funds had assets that were far easier to get rid of on the stock market, meaning that “perhaps the alternatives funds will be a target for another day”.
Meanwhile, analysts noted that it was an odd time for the hedge fund to target some of the trusts, as Keystone Positive Change put forward a proposal to shutter earlier this month, while Edinburgh Worldwide announced management changes and a capital return commitment last month.
“We don’t see how it can really accuse Keystone Positive Change’s board of inaction given the steps that it has taken,” said Matthew Read, senior analyst at Quoted data.
Meanwhile, Read stated the plan to overhaul trusts and quickly deliver liquidity and returns was an “obvious flaw” in the plan, as a noisy takeover and sell-off of assets could cause the market to quickly move against the sellers.
In addition, many of the trusts do have some level of unquoted assets in their portfolio, meaning it could take years for the hedge fund to sell them off.
“These are long-term investments and, for some, the pay outs can be big as has recently been illustrated by the spectacular success of SpaceX,” said Read, referring to Bailie Gifford US Growth.
“Saba doesn’t really understand some of the funds that it is invested in,” he claimed, arguing its approach was “very short-term in nature.”
“It is well-documented that Saba has been successful with similar attacks in the US but the UK closed end fund market is fundamentally different,” he added. “Standards of corporate governance are higher, and returns have generally been better, so this sort of approach makes less sense.”