Activist pressure prompts investment trust to convert to an ETF
If the proposals are given the green light by shareholders, this will be the first-ever investment trust conversion to an ETF structure.
6th May 2025 12:19
by Kyle Caldwell from interactive investor
Boaz Weinstein, centre, at the 2023 Forbes Iconoclast Summit in New York. Photo by Taylor Hill/Getty Images.
An investment trust targeted by US activist investor Saba Capital has proposed converting to an exchange-traded fund (ETF) or offering shareholders an exit close to the value of its investments – the net asset value (NAV).
The board of Middlefield Canadian Income Ord (LSE:MCT) made the proposals following pressure from Saba Capital, run by Boaz Weinstein (pictured above, centre).
- Invest with ii: Open an ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA
In February, the US activist investor called on the investment trust to become an open-ended fund with the same investment strategy of focusing on Canadian companies. It has a market capitalisation of £125 million, so as a result struggles to attract the intention of large buyers – the wealth managers. This is because wealth managers focus on investment trusts with assets of more than £300 million in order to have sufficient liquidity.
Saba said that open-ended funds, which have a single price, are “free of the structural issues that plague closed-end funds”.
Saba, which holds a 29% stake in the investment trust, requisitioned a general meeting on its proposal, but then withdrew it for 60 days to allow the board of Middlefield Canadian Income to consider its proposal. It was announced at the end of last week (2 May) that the intention is for the investment trust to convert to an ETF. Alternatively, shareholders can cash in close to NAV. The current discount is -6%.
If the proposals are given the green light by shareholders, with a circular expected in August, this will be the first-ever investment trust conversion to an ETF structure. It will be an active ETF, with the board pointing out that it will “retain exposure to high-quality, Canadian and US large capitalisation businesses focusing on high levels of stable and increasing income”.
- What are active ETFs and should you invest in them?
- What’s behind more investment trusts joining forces?
Similar to investment trusts, an ETF also has a share price and NAV. This can, on occasions, diverge, but most of the time an ETF will trade close to NAV. The key difference with ETFs is that they are designed to minimise the difference between share price and NAV, known as the creation/redemption process. For a more detailed explanation, read our separate article.
The board of Middlefield Canadian Income acknowledges that under the ETF structure it would trade close to NAV. It also says that its fund fee will be lower.
Michael Phair, chair of Middlefield Canadian Income, said: “The board continues to have strong conviction in the company’s investment proposition and its ability to deliver a high level of income and long-term capital growth. However, the board has listened to feedback from shareholders and recognises that the constrained liquidity and persistent discount to NAV remain impediments to new and further investment.
“Accordingly, the board is actively working on the terms of the transaction, which, if approved, would provide shareholders with an opportunity to continue their investment in the existing strategy through the ETF option, or the realisation of their investment at close to NAV, or a combination of both.”
A spokesperson for Saba Capital said Middlefield Canadian Income's switch to an ETF structure "will not only provide all shareholders the long-overdue liquidity opportunity they deserve, but it will also ensure the Trust never again trades at a discount to NAV."
The spokesperson added: "Building on this milestone, Saba remains committed to serving as a positive and transformative force for the sector by enhancing liquidity, strengthening governance, and unlocking long-term value for all shareholders.”
Deutsche Numis, the investment trust broker, said the latest intervention by Saba should be “another wake-up call for boards across the investment trust sector to assess strategies, particularly those investing in liquid, large-cap, diversified underlying portfolios that could be run with active discount management, or potentially ‘zero’ discount mechanism, without comprising the investment style.
“Providing visibility of trading liquidity is increasingly important, whatever the size of an investment company. In addition, we believe that investment companies need to justify their existence with strategies and features that set them apart from other structures.”
Earlier this year, in a separate campaign, Saba sought to removed the boards of seven investment trusts, which would have led to new investment approaches. However, shareholders at Edinburgh Worldwide (LSE:EWI), Keystone Positive Change, Baillie Gifford US Growth (LSE:USA), The European Smaller Companies Trust (LSE:ESCT), Henderson Opportunities, CQS Natural Resources G&I (LSE:CYN) and Herald (LSE:HRI) all rejected the proposals.
Two of the seven trusts no longer exist. Keystone Positive Change merged into open-ended fund Baillie Gifford Positive Change, while Henderson Opportunities Trust merged into the open-ended fund Janus Henderson UK Equity Income & Growth fund. Both also offered shareholders cash exits at or close to NAV.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.