Fund Focus: get ready for more activist tussles

I would forgive anyone a sense of fatigue - and frustration - when it comes to updates about Saba Capital. 

It’s more than 18 months since the US activist launched its initial campaign to oust the boards at seven investment trusts and there have been plenty of shenanigans since then.

But it’s worth briefly discussing two developments of the last week or so, the first of which affects one big beast of the sector.

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Followers of the Saba saga will likely know that Baillie Gifford US Growth Ord (LSE:USA) has already fended off the activist twice – at the vote on Saba’s proposals in early 2025 and then later the same year when Saba opposed the reinstatement of the board.

But as with Baillie Gifford stablemate Edinburgh Worldwide Ord (LSE:EWI), Saba is back for more. It wants to put forward proposals at the trust’s next annual general meeting (AGM) to appoint its own board via its suggested directors, Jason Chen, Thomas McGlade and James Waterlow.

That board intends to give USA shareholders a full cash exit at or near portfolio net asset value (NAV) if put in place. The trust’s shares traded at a discount of 6.5% to NAV at the time of writing.

Some of the usual arguments apply in this case. Saba describes the cash exit as a “long-overdue liquidity event”, and it would likely be at a profit to the current discount. It also follows a difficult period for USA: like many Baillie Gifford funds it got hit hard in 2022 and looks weak if we judge its five-year returns (a small loss).

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And yet I would understand any frustration at USA’s potential fate, if Saba wins out this time. The fund has started to regain its poise, having benefited from its early stake in Space Exploration Technologies Corp Class A (NASDAQ:SPCX). And there should be more possible IPO gains to come, given that it holds Anthropic and other names rumoured to float in future, such as Databricks.

As with Edinburgh Worldwide, investors at least have similar funds to jump into if this trust falls. 

Scottish Mortgage Ord (LSE:SMT) has similar holdings, the same investment style and the same access to private companies that might prove a big deal in future. 

There’s also the open-ended Baillie Gifford American B Acc (0606196), although this fund lacks the ability to invest in unlisted companies. 

Private businesses are certainly a big part of the package with both USA and SMT. Some 26 private companies accounted for just shy of 30% of the USA portfolio at the end of July. 

Baillie Gifford US Growth vs some stablemates

Source: FE Analytics. Past performance is not a guide to future performance.

So investors, used to the long-term requirements of holding a Baillie Gifford fund and seeing some green shoots, might feel frustrated but have a place in which to park their cash if Saba wins.

The other Saba case study of the moment is Gore Street Energy Storage Fund Ord (LSE:GSF), one of the remaining two battery funds alongside Gresham House Energy Storage Ord (LSE:GRID).

Once seen as the more stable battery fund thanks to its diversification of investments across different geographies, Gore Street Energy Storage nevertheless saw its shares plummet in 2024. 

They then rebounded slightly from those lows last year and have struggled more recently. The trust has this year refreshed its board and unveiled plans to sell assets, pay “enhanced” dividends to shareholders and look to increase the duration of some of its assets, so as to increase their value ahead of a potential sale.

However, Saba has criticised the fund’s continued poor performance and its big discount to NAV, as well as the process around two asset sales. 

The US activist wants Gore Street to begin a formal wind down process, while the board argues that not enough time has been allowed for its new strategy to bear fruit. Investors will be able to vote on that proposal in September.

Should you back Saba here?

Without getting too bogged down in the back and forth, it’s worth observing that shareholders don’t have an easy choice when voting. Unlike with a portfolio of listed equities, you have no quick way out if the trust does go into wind-down. 

These assets will take time to sell and it could be years until you get the money back. Good valuations are not guaranteed – and GSF’s board has indeed argued that a wind-down process could prompt a fire sale of its assets.

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And yet there’s an argument in favour of voting for wind-down, too. 

As Peel Hunt analyst Markuz Jaffe recently put it: “It could well be the case that the most likely way to drive a share price re-rating for GSF would be to formally place the company in wind-down and formulate a sales strategy for every asset, individually or as a portfolio.

“We believe this would increase the appeal of GSF to value-seeking investors that would be better able to assess the company, where the current status quo could potentially see the company limp along for several years more as a going concern.”

There are certainly no easy answers here. 

And, whether or not an activist is involved, it reminds us that buying into renewable energy infrastructure trusts for their bombed-out valuations can turn into a protracted affair, rather than a quick profit. Bargain hunters beware.