This is potentially a historic day (22 January) for the UK investment trust sector, with Herald Investment Trust’s (HRI) shareholders about to kick-start a string of crucial votes to either approve or reject a radical agenda pursued by US raider Saba Capital Management.

Saba has built sizeable stakes in seven trusts in recent months, mostly by using a leveraged strategy via total return swaps, and wants to oust their existing boards, replace them with new directors proposed by Boaz Weinstein-steered Saba and take over the management of the assets.

For more on the background to Saba’s campaign, the defences set out by the trusts and how you can have your say, click on the link to our recent cover story below.

IN SABA’S SIGHTS

The trusts targeted by Saba are Katie Potts-managed Herald, Baillie Gifford US Growth (USA), CQS Natural Resources Growth & Income (CYN), Edinburgh Worldwide (EWI), European Smaller Companies (ESCT), Henderson Opportunities (HOT) and Keystone Positive Change (KPC).

At the upcoming meetings, investors will need to think hard about whether they want to jettison the existing management teams and their investment process in favour of an activist strategy run by Saba.

Should the proposals pass, the reconstituted boards will assess options for delivering value to shareholders including Saba being proposed as the new investment manager of each of the trusts, with a potential change in mandate to invest in discounted trusts, as well as shareholders being offered a liquidity event near NAV, for those not wishing to remain invested if the manager/mandate were to change.

While typically low, the turnout of retail investors who make up meaningful portions of the registers will be key to the results at the general meetings.

ANALYST VIEWS

‘The impact of the proposal has much broader implications for the London market, which needs permanent capital vehicles,’ argues paid-for research firm Edison. ‘We encourage all investors to vote at the forthcoming general meetings and we aim to provide as much information as possible so that they can make an informed choice.’

J.P. Morgan says: ‘Saba stands to gain management fees on the entire ongoing vehicle if appointed. This will be the default option and given high retail ownership it will maximise the size of the ongoing vehicle. To the extent that retail shareholders are effectively disenfranchised by interia we will not know what they really think of Saba’s proposals. But the acid test on the attractiveness of Saba’s proposals will be how much support it gains from independent shareholders who do vote.’

Also weighing in is Thomas McMahon, head of investment companies research at Kepler Partners, who says it is true that the investment trust sector has a number of small-scale trusts, and a number of long-term underperformers and trusts which it could be argued don’t have much of a unique selling point.

‘But many of them have been wound up or merged away over the past 18 months and Saba hasn’t targeted those that remain, but instead largely targeted trusts that have a lot to offer,’ explains McMahon, who also insists Saba has made a number of incorrect and unfair claims about the trusts it has attempted to take control of.

McMahon observes that Saba has used the wrong benchmarks to consider the performance of Herald and of CQS Natural Resources & Income.

‘Plus, while some of the trusts performed well in the past but have hit rough patches, others have actually performed extremely well in recent years too,’ he explains.

‘For example European Smaller Companies Trust has delivered strong outperformance of sector and benchmark over three, five and 10 year periods. Additionally, a number of the trusts they have targeted are of a decent size which could attract both professional and retail investors. And of course, Keystone had actually published plans to offer a full cash exit to shareholders already, so to claim the board hasn’t acted in the face of performance and discount troubles is clearly incorrect.’

McMahon continues: ‘In fact, it appears the real reason Saba has targeted these trusts is the high level of retail shareholders. As they tend not to vote, Saba has a higher chance of winning a majority of votes cast. While all is fair in love and markets, this seems a bit tawdry and disappointing, and UK investors would lose a number of attractive and differentiated options if the votes are won. However, it is worth bearing in mind that it may be all this is a negotiation, and Saba will end up being satisfied if all its shares are bought back at NAV. Investors should use their votes wisely!’

Disclaimer: The editor of this article (Ian Conway) owns shares in Edinburgh Worldwide Investment Trust

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