An activist investor is hoping to seize control of seven underperforming London-listed investment trusts after urging shareholders on Wednesday to sack their respective boards.
Saba Capital published an open letter to shareholders of the seven trusts, calling for them to vote to sack entire boards and replace them with ‘new, highly qualified candidates’ – including the hedge fund’s own executives.
Saba has built stakes of 19 to 29 per cent in each of the trusts, which have suffered yawning discounts to their net asset value as investors have shunned their shares.
The trusts affected are Baillie Gifford US Growth, CQS Natural Resources Growth & Income, Edinburgh Worldwide, European Smaller Companies, Henderson Opportunities, Herald Investment Trust and Keystone Positive Change.
Targeting trusts with big discounts to NAV is a key part of Saba’s investment strategy, from which it hopes to build an ETF targeting London-listed investment companies.
Boaz Weinstein, founder and chief investment officer at Saba Capital, told the shareholders of each trust that their current investment manager and board’s ‘inability to mind the gap between each Trust’s trading price and NAV has destroyed significant value for shareholders’.
Coup: Saba Capital is eyeing an overhaul of London-listed investment trusts
He noted that each trust has seen its discount to NAV narrow significantly over the last six months, though Weinstein attributes this to the impact of Saba building its stake.
‘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 we are unsuccessful in our pursuit to reconstitute the Boards of the seven Trust,’ he added.
Saba has called on each trust to requisition a general meeting ‘as soon as possible’ for shareholders to vote on the proposal ‘by early February’ next year.
It hopes to have Weinstein appointed to the board of Baillie Gifford US Growth, while principal executive officer of Saba’s investment trusts Paul Kazarian would join the board of the other six.
Saba has also nominated seven independent directors, each of which would join one of the boards.
Weinstein said: ‘The trusts’ managers and their directors have failed shareholders. Performance demonstrates that they have not taken sufficient steps to resolve the Trusts’ structural issues, depriving shareholders of superior returns.
‘While there are multiple levers to narrow these persistent discounts, inaction has been the consistent course of current leadership.’
‘By fully reconstituting the trusts’ boards, we believe that we can unlock greater value for shareholders and address the long-term structural issues that have hamstrung the Trusts’ return potential under current leadership.
‘Each of the director candidates shares a deep commitment to improving shareholder returns and putting your interests above their own.’
Each trust has struggled against a large discount to net asset value
An ‘obvious flaw’ in Saba’s strategy?
Baillie Gifford, which manages US Growth, Edinburgh Worldwide and Keystone Positive Change, acknowledged the letter but did not comment further.
This is Money has also contacted Janus Henderson, manager of European Smaller Companies and Henderson, and Herald Investment Management for comment.
Below, Matthew Read, a senior analyst at investment trust specialist Quoted Data, explains why he sees ‘an obvious flaw’ in Saba’s strategy.
‘Saba wants shareholders to replace the current boards and deliver on its plan to ‘quickly deliver substantial liquidity and long-term returns for all shareholders’.
‘However, those two are often mutually incompatible, particularly for some of the funds it is targeting where the underlying holdings are less liquid.
‘Herald [is] the obvious example as it is a big fund with a huge tail of small illiquid positions that trade by appointment that could take years to sell off and you would likely move the market against you in many of these, particularly once the market spots you as a forced seller.
‘The call for substantial liquidity also ignores the unquoted positions held by trusts such as EWI and USA.
‘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. Saba also seems to be targeting trusts facing cyclical challenges – such as CQS Natural Resources.
‘This and the other challenges we highlighted above have long made us feel that Saba doesn’t really understand some of the funds that it is invested in. 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.
‘Standards of corporate governance are higher, and returns have generally been better, so this sort of approach makes less sense, particularly now that progress has been made on addressing problems such as the cost-disclosure issues and so discounts are now retrenching.
‘It seems to us that their approach is very short-term in nature and this highlights a long running issue that, because many retail investors hold their shareholdings through platforms and do not tend to vote, large professional investors get a disproportionate amount of the vote.
‘This can lead to outcomes that are not in the interests of all shareholders and so we think it is all the more important that shareholders in these funds make sure their interests are being protected and get out and vote.’
Saba has build significant stakes in each of the trusts
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This article was originally published by a www.dailymail.co.uk . Read the Original article here. .