How seven investment trusts targeted by activist have responded

In mid-December, US activist investor Saba Capital sent shock waves through the closed-ended fund sector by calling for the removal of board members at seven investment trusts in which it is the largest shareholder.

Activist investors circling investment trusts is not a new phenomenon. From 2011 to 2017, Alliance Witan (LSE:ALW) had to fend off campaigns for change from both Laxey Partners and Elliott Associates.

But what’s different now is that a group of investment trusts have been targeted at a time when the sector is out of favour, reflected in the average trust discount being in the mid-teens. Discounts reflect the gap between an investment trust’s share price and the value of its underlying investments, called the net asset value or NAV.

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Of the seven trusts, three are managed by Baillie Gifford: Edinburgh Worldwide (LSE:EWI), Keystone Positive Change (LSE:KPC) and Baillie Gifford US Growth (LSE:USA). Two are managed by Janus Henderson, The European Smaller Companies Trust (LSE:ESCT) and Henderson Opportunities (LSE:HOT), while the other two being targeted are CQS Natural Resources Growth & Income (LSE:CYN) and Herald (LSE:HRI).

Boaz Weinstein (pictured above), who runs Saba Capital and oversees $5.5 billion (£4.4 billion) in assets at the New York-based hedge fund, said: “What has caught my attention for the past three years is that the UK trust industry’s discounts have deepened as a consequence of investors losing faith in managers after shockingly poor performance in certain trusts. At the same time, the boards have not held those managers accountable.

“Saba prefers private engagement with the boards of the trusts we invest in, but underperformance, persistent trading discounts and disengaged management teams leave us no choice but to act. The value creation opportunities are vast when trusts are overseen by skilled managers and boards operating with best-in-class governance. This is why we believe change is urgently needed at these trusts.”

When will the votes take place, and how do I vote?

Shareholders will have the opportunity to have their say on the activist’s proposals as general meetings will take place in the coming weeks, with Saba Capital calling for meetings to take place by early February.

The dates announced so far are detailed in the table below.

Interactive investor customers will be able to vote via the Voting Mailbox in their online account (under “portfolio” at the top of the page). Our customers also receive notifications through their ii app “voting mailbox” service, informing them when they are eligible to place a vote.

In November 2021, interactive investor made the ability to vote online a default option for all customers, rather than them having to opt-in to use the platform’s voting capability. 

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The meetings have been triggered by Saba Capital’s share ownership - it owns between 19% and 29% in each trust. Under the Companies Act 2006, the required percentage of share capital that must be held by a group of shareholders to be able to requisition a general meeting is 10%.

Each voting item will require more than 50% of the votes cast to be in favour of the boards’ removal in order to pass. Given Saba Capital’s stake, a low voter turnout would hand the activist a greater percentage share of the vote.

Therefore, it is important that retail investors consider having their say. While it is easy to think that as a small shareholder your vote will not make a difference, if increasing numbers of investors engage and use their votes it will result in retail investors having greater influence.

Saba Capital’s proposals

The hedge fund has proposed two resolutions. The first is to “remove all current directors of the trusts”, and the second is to “appoint new, highly qualified candidates to replace them”.

Saba Capital has put forward its choices for two new directors for each investment trust.

If appointed, Saba Capital said the new directors will consider all options for each trust, including tender offers (which give shareholders the opportunity to sell shares back to a company at a level above their current price), share buybacks (an attempt to reduce the discount), terminating the current investment management firm, replacing the current fund managers, and changing the investment mandates.

It has also suggested potentially merging some of the trusts to form a new strategy of purchasing other discounted trusts. Saba Capital said it “intends to explore possible means by which portfolios of the trusts may be aggregated, where appropriate, to realise scale benefits and synergies”.

It has also put itself forward as a potential replacement as fund manager for each trust.

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Saba Capital added: “If the director candidates are appointed, they intend to first assess options to provide shareholders the opportunity to achieve substantial liquidity near NAV if they do not wish to remain in a trust with a new investment manager and mandate.”

Central to Saba Capital building up stakes to make this move is that investment trust discounts have hit high levels over the past couple of years. In its view, the current boards have not held the investment managers accountable for the trusts’ wide discounts.

As we reported last month, many of the seven trusts have seen their discounts narrow over the past couple of months. Saba Capital says this is “a direct result of Saba building its total stake in these trusts to £1.5 billion”.

It added: “Without such buyer demand or the prospect of active steps being taken to improve returns to shareholders, there is a risk of the trusts’ share prices falling and discounts widening again if Saba is unsuccessful in our pursuit to reconstitute the boards of the seven trusts.”

How each investment trust board has responded

Following the calls for general meetings to take place, all seven investment trust boards responded by urging shareholders to vote against Saba Capital’s proposals ahead of the meetings. Below, we run through the response from each trust board.

Edinburgh Worldwide

Out of the seven trusts, the global smaller companies investment trust will likely hold its general meeting last. This is due to it asking Saba Capital to resubmit its requisition notice to replace the board on the grounds of not being “the registered holder of sufficient shares on the date” the original notice was served last month.

This was a technicality in terms of how the shares were held, which has now been ironed out (on 6 January 2025). Therefore, the meeting will go ahead.

Jonathan Simpson-Dent, chair of Edinburgh Worldwide, has urged all shareholders to vote against Saba Capital’s proposed resolutions.

He said: “Edinburgh Worldwide is an exciting and unique investment trust that offers unparalleled access to emerging companies, operating at the frontiers of science and technology. All this is threatened by Saba Capital. The proposals set out by Saba amount to a backdoor attempt to seize control of the trust. We will urge all our investors to protect their investment, to protect their trust - and to vote to stop Saba.”

A month before Saba Capital’s proposals, Edinburgh Worldwide announced plans to make changes to the portfolio, which included a reduced number of holdings and the appointment of two additional co-managers to work with longstanding manager Douglas Brodie.

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Edinburgh Worldwide invests in “initially immature entrepreneurial companies” from around the world. This includes an 8.4% position in Elon Musk’s private SpaceX firm, its biggest holding.

Performance has been disappointing since rising interest rates in late 2021 curtailed demand for riskier investments. However, 2024 was an improvement versus the past couple of years for its share price and net asset value (NAV), up 24% and 6.3%.  

Keystone Positive Change

Karen Brade, chair of Keystone Positive Change, said the board is “appalled by Saba’s actions and conduct”.  

She added: “We believe its proposed resolutions would be highly detrimental to the interests of all other shareholders. Be under no illusion - we believe this US hedge fund manager is acting opportunistically, seeking to seize control of the board without a controlling shareholding, to pursue its own agenda.

“We believe Saba’s plan lacks transparency, would flagrantly disregard good governance, and may introduce substantially inflated fees. The proposed resolutions are not in the best interest of all shareholders and create significant uncertainty.”

Keystone Positive Change notes that Saba Capital has declared interests in approximately 28% of the company’s shares. Therefore, the investment trust says at least 30% of other shareholders are needed to vote against the proposals for them to be blocked.

A couple of months prior to Saba Capital’s proposals, Keystone Positive Change announced a plan offering shareholders an exit at close to the NAV or the option of rolling their money into a sister fund run by the same team, Baillie Gifford Positive Change.

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Baillie Gifford took over the mandate of Keystone from Invesco in early 2021, during a boom period for the growth shares the firm specialises in. However, it proved to be a case of bad timing, with returns disappointing as the growth style of investing fell out of favour as interest rates rose.

Brade adds: “Given Saba’s considerable voting position, every vote against its resolutions is vital. We strongly urge all shareholders to vote against all resolutions - a high turnout is critical. Refraining from voting will risk ceding control of your company to Saba.”

Baillie Gifford US Growth

Tom Burnet, non-executive chair of Baillie Gifford US Growth, said the investment trust has delivered what it promised since it launched in March 2018.

Burnet points out that those who bought at IPO “have nearly tripled their initial investment”. To 31 December 2024, its total share price return has been 180.1%.  

He added: “Further, the growth outlook for our portfolio companies is extremely strong. Baillie Gifford’s global reputation provides it with preferential access to the US growth companies of tomorrow, so the future of this company is bright.

“Saba wants to subvert all of this. Their proposals lack detail and if implemented, could destroy the board’s independence, radically alter the investment strategy of the company and prove highly disruptive to shareholder value.

“We urge all shareholders to make their voices heard and to vote against Saba’s self-serving and destructive proposals.”

The investment trust invests in high-growth stocks, both listed and unlisted. In common with Edinburgh Worldwide and Keystone, the three-year performance figures have suffered amid the growth investing style falling out of favour.

Over three years, its share price total returns are 5.8%. However, performance has been improving and over one year, it has delivered a strong gain of 68.1%.

The European Smaller Companies Trust

The European Smaller Companies Trust refuted Saba Capital’s claim that it has underperformed. It said: “The independent board and investment manager, Janus Henderson Investors, have delivered both long-term NAV and share price total returns, outperforming both the company’s peer group and its benchmark, the MSCI Europe (ex UK) Small Cap Index.”

It supplied figures showing that both its share price total return and NAV total return were ahead of the benchmark over multiple time periods. Over five years, its share price total return is 63% and NAV total return is 51.6%. Over the same period, the MSCI Europe (ex UK) Small Cap index is up 27%.  

Today (8 January), the trust, which is one of our Super 60 investment ideas, has been placed under review by our analysts.

The board points out that Saba’s proposals indicate that they will not continue to invest in the European small-cap sector. It notes that any new investment strategy could radically alter its shareholders’ exposure away from European small-cap equities.

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James Williams, chair of The European Smaller Companies Trust, said: “The European Smaller Companies Trust is a well-managed investment company whose strategy has delivered long-term outperformance.

“Saba is attempting to take control of your company by removing a highly qualified, independent board that acts in all shareholders’ interests. 

“It’s clear that Saba’s motives are self-serving. It would like to install directors who would not be independent of the company’s largest shareholder and has indicated that it may appoint itself as investment manager.

“This could endanger shareholder protections, radically alter the company’s investment risk profile and deny investors the opportunity to benefit from the proven European small-cap investment strategy.

“The board is therefore recommending that shareholders vote against all resolutions proposed. Saba is counting on a high proportion of shareholders not voting. Investor participation is key and will determine the company’s future.”

Henderson Opportunities Trust

The other Janus Henderson-managed investment trust has announced plans to wind up the company, giving its shareholders the option to sell at NAV or to roll over their investment into the open-ended Janus Henderson UK Equity Income & Growth fund.

Its board points out that Saba Capital has not guaranteed a cash exit for existing shareholders should it take control, unlike the full cash exit at NAV which it is offering.

Wendy Colquhoun, chair of Henderson Opportunities Trust, said: “We are asking our shareholders to vote against the resolutions proposed by Saba, which bring significant uncertainty and risk.  

“The current independent board is offering shareholders the choice of a full cash exit at NAV or the option to rollover into an open-ended fund managed by Janus Henderson Investors. If Saba succeeds, this offer is at risk of being cancelled with no comparable substitute.

“Saba is attempting to take control of the company with no assurances as to what will happen to shareholders’ investments. Saba wants to remove a strong and highly qualified independent board that acts in the interests of all shareholders and replace it with its own non-independent board that may put Saba’s interests first.  

“The board’s message to shareholders is clear: please exercise your vote and don’t let Saba take unnecessary risks with your money.”

CQS Natural Resources Growth & Income

The specialist energy and mining investment trust defended its long-term performance, pointing out that since October 2015 under its current fund managers it has delivered 220% in total return share price terms.

Christopher Casey, independent non-executive chair of the company, said: “Saba’s proposals are without merit, introduce new and significant risk to your investment and are not in the best interests of all shareholders.

“Their claims of the company’s underperformance are misleading, their proposals demonstrate a self-interested short-term focus, their track record is questionable and, if the requisitioned resolutions are passed, you may no longer be invested in a highly specialised natural resources investment trust with good governance and a clear strategy.”

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The board added that its fund managers are “widely recognised as being leading investors in their field, are the team best placed to continue this strong performance in the natural resources sector [that] shareholders have chosen to invest in”.

Herald

First out of the blocks for the shareholder vote is global smaller companies trust Herald, which focuses on technology and communications. The meeting will take place on 22 January 2025.  

Andrew Joy, chair of Herald Investment Trust, defended its long-term performance.

“Since launch in 1994, Herald Investment Trust’s investment strategy has delivered outstanding investment performance and substantial returns for its shareholders, and its offering is both successful and unique in the UK-listed investment company sector.

“The board believes Saba wishes to take control of the company for its own economic benefit and to change the company’s investment strategy, which your board believes could result in significant value being lost for you, our shareholders.”

The board added that if Saba gains control and seeks to implement a different strategy, significant value could be lost for shareholders as a result of forced selling of parts of the portfolio. The investment trust has a number of small illiquid stocks that will prove trickly to sell quickly.

It urged shareholders to “vote against the requisitioned resolutions to protect the value of your investment and to ensure Saba does not take control of your company for its own economic benefit”.

Over three years, Herald’s share price total return is flat, up just 1%. But over one, five and 10 years, performance has been strong versus rivals, up 34%, 70.6% and 278.7%.