There is a lot of negativity around Saba Capital’s assault on the investment trust sector. For those unaware, the US hedge fund has built up large stakes in undervalued investment companies and is proposing to replace the boards of seven.
This would be followed by replacing the current managers with Saba, which would change the mandates from their current strategies to investing in fellow undervalued investment trusts.
Earlier this week the firm lost its first battle, with Herald scoring a resounding victory in its extraordinary general meeting.
According to the trust’s chairman Andrew Joy, some 99.78% of all votes cast by non-Saba shareholders were in favour of the incumbent board members.
the villain and investment trusts are the superheroes battling bravely to keep themselves alive.
But however you frame the narrative, there is a lot of good coming from this wake-up call.
Saba has stated it aims to highlight the wide discounts on offer and the lack of measures being taken to arrest this and deliver value to shareholders. In and of itself, whether you agree with the methods, anything that aims to create value is somewhat noble.
This first fight was always one that was expected to fail. Herald has rarely, if ever, released new shares and has a strong long-term track record. Investors who have backed manager Katie Potts tend to have done so for a long time and she has earned their trust.
But there are six more trust battles yet to take place. The majority occur next week while the last one is on 14 February. These are: Baillie Gifford’s Edinburgh Worldwide, Keystone Positive Change and Baillie Gifford US Growth; Janus Henderson’s European Smaller Companies and Henderson Opportunities; and CQS Natural Resources Growth & Income.
The big question is whether it will be a clean sweep for the investment trust sector or if Saba will succeed in any of its attempts to uproot the status quo.
Below I have highlighted two trusts where the US hedge fund could have more luck. For clarity, I believe Saba faces an uphill struggle to win any of the seven battles in front of it.
To my mind, its biggest challenge is convincing investors in the Baillie Gifford trusts to switch allegiances. The Edinburgh-based firm is adept at explaining its process and has been upfront consistently through its good and bad times that there will be periods of underperformance.
Edinburgh Worldwide and Baillie Gifford US Growth were launched by Baillie Gifford with investors likely understanding what they were buying.
Perhaps the only one that could be up for debate, however, is Keystone Positive Change, which moved to Baillie Gifford in 2021 from Invesco where it had been run by Mark Barnett.
At this time, the trust switched from a UK strategy to a global one focusing on positively impacting the world. There may still be investors who have held the trust throughout but are unconvinced with the success of this transition as, since 10 February when the trust changed hands, it has made a loss of 23.5%, the second-worst in the IT Global sector.
Keystone’s board has recognised the trust’s difficulties and proposed a merger with the open-ended Baillie Gifford Positive Change fund.
The other trust where Saba could have more luck is Henderson Opportunities Trust, run by FE fundinfo Alpha Manager James Henderson and Laura Foll.
Although the managers have done a good job over the past five years, with the trust second among the six peers in the IT UK All Companies sector, over 10 years it is fifth out of six.
The managers have proven excellent in running fellow investment trust Law Debenture but the track records in their open-ended Janus Henderson UK Equity Income & Growth fund and other investment trust Lowland are lacking over 10 years, with all three in the bottom quartile of their respective sectors.
There are reasons for this. The managers take a value approach and often hunt in the mid and small-cap space, which has been unloved for much of the past decade.
However, when it comes to Henderson Opportunities, the size of the trust (with a market capitalisation of just £86.5m) could count against it. What’s more, the board had already started work on potentially winding up the trust, offering shareholders an unlimited cash exit at net asset value (NAV), or to roll over their investment into Janus Henderson UK Equity Income & Growth.
This could work in its favour as investors seek an easy exit or could lead shareholders to vote against the board in an attempt to try something new and remain within the investment trust structure.
Whatever happens, the next few weeks could prove pivotal for the investment trust universe. If Saba is successful in any of its battles, could it open the floodgates to more aggressive moves from hedge funds in the future? We will have to wait and see.