Ian Cowie: my take on Saba’s latest attack on Edinburgh Worldwide

Why would shareholders with exposure to one of the most exciting businesses on this planet, investing alongside the best-known billionaire on earth, sell out to vague proposals from the other side of the Atlantic? That’s the mystery which baffles me about Saba Capital’s attempt to gain control at Edinburgh Worldwide Ord (LSE:EWI) and Baillie Gifford US Growth Ord (LSE:USA).

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Both investment trusts’ biggest underlying asset is Elon Musk’s Space Exploration Technologies, better known as SpaceX, and probably the world’s most valuable unlisted business. SpaceX, and its subsidiary Starlink, have launched more than 10,000 low earth orbit (LEO) satellites and 8,811 of them continue to bring the internet and mobile telephony to parts of the planet that might never have got either from cable.

As pointed out here before, if Starlink can boost data volumes sufficiently, it has the potential to replace every internet service provider (ISP) on earth. Broadcasting through the air is much better and, eventually, cheaper than digging up the roads.

Because LEO satellites are not as distant from us as their conventional rivals, “latency”, or the delay between signals being sent and received, is dramatically reduced. British Airways, Air France and Virgin Atlantic are among airlines that plan to offer Starlink connectivity on long-haul flights next year.

Coming back down to earth, nearly 12% of EWI’s £820 million assets, and more than 9% of USA’s £869 million funds, are invested in Starlink but both investment trusts continue to be priced below their net asset value (NAV). EWI trades at a 4.3% discount, while USA is priced 6.7% below NAV.

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Top 10 assets at EWI include other interesting businesses, such as the body camera and Taser stun gun-maker Axon Enterprise Inc (NASDAQ:AXON) and the drone-maker AeroVironment Inc (NASDAQ:AVAV), and this trust sits in the Association of Investment Companies’ (AIC) “Global Smaller Companies” sector.

Meanwhile, USA owns stakes in the Facebook to Instagram group, Meta Platforms Inc Class A (NASDAQ:META), and the online retailers Amazon.com Inc (NASDAQ:AMZN) and Shopify Inc Registered Shs -A- Subord Vtg (NASDAQ:SHOP), sitting in the AIC’s “North America” sector.

Both investment trusts were trading at much bigger discounts before the New York-based activist investor Saba Capital bought 30% stakes in them and became their largest shareholder. So smaller investors, including your humble correspondent, have reason to be grateful for Saba, even if - on a seasonal theme - its intentions might not be quite as altruistic as Santa.

Last December, Saba proposed sacking all USA’s directors and replacing them with its own representatives to improve returns from this investment trust. Independent statisticians at Morningstar report that USA delivered total returns of 3.3% over the last year, following a loss of -3.4% over five years and it lacks a decade-long record, having been launched in 2018.

That places USA fifth out of six funds in its sector over the shorter term and sixth out of six over the medium term. Not exactly a stellar performance.

Meanwhile, EWI - where I paid £1.52 per share in January 2024, for stock that currently costs £2.03 - delivered total returns of 12% over the last year, following a loss of -37% over five years and gains of 127% over the decade.

That places EWI first out of five funds in its sector over the short term; fifth out of five over the medium term; and second to Herald Ord (LSE:HRI) over the long term. Talk about volatility!

It’s only fair to report that more than 98% of USA’s non-Saba shareholders voted against its proposals last February. Now Saba is blocking EWI and USA’s plan to merge the two trusts, both of which are managed by Baillie Gifford.

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This week, Saba issued a statement saying: “By pushing for a merger that benefits Baillie Gifford rather than shareholders, EWI’s board has confirmed where its loyalties truly lie. Shareholders deserve a board that puts them first — not another cosy deal that entrenches an unaccountable manager.”

It added: “Unfortunately, the board has failed to take the actions necessary to combat years of underperformance. The magnitude of value destruction at EWI over the last five years remains unprecedented among peer UK equity investment trusts over this period.

“For this reason, we have requisitioned another general meeting, which we expect to be scheduled by early 2026. There, shareholders will be asked to vote on resolutions to remove the incumbent directors and appoint three new qualified, independent directors committed to delivering long-term value.”

It named its candidates as Gabi Gliksberg, Jassen Trenkow and Michael Joseph, but did not say how they would improve investment returns.

However, it did add: “To source these nominees, we intentionally avoided the traditional small UK network of repeat non-executive directors who often sit together on multiple trust boards.

“This entrenched system of familiarity and industry ‘cosiness’ often weakens accountability and contributes to persistent underperformance, double-digit discounts and decisions that protect the interests of managers rather than shareholders.”

Jonathan Simpson-Dent, EWI chair, responded: “Saba has for a second time launched a power grab calling for the entire board to be replaced with US candidates of their own choosing. Their goal is to gain control of the company to prioritise their own commercial interests.

“Saba’s letter does not acknowledge the significant progress EWI has achieved since this board reset the company on a path for growth a year ago. Since then, NAV total return has been 13.1%, well ahead of the Standard & Poor’s Global Small Cap Index, which is up 5% and is the company’s benchmark index.

“Shareholders should not be fooled by the US hedge fund’s claims. This board remains fully committed to serving the best interests of all shareholders. Saba’s proposal would result in a board answerable to only one.”

Phew. Pass the popcorn!

Amid all this excitement, it is comforting to see that EWI and USA directors will share the pleasure or pain of ordinary shareholders, whatever happens next. According to the stockbroker Investec and its “skin in the game” research, four out of EWI’s six directors have more invested in this trust than their annual fees and the fund managers also own stock worth £2.1 million.

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Even more impressively, USA’s four directors all own more shares in this trust than their annual fees, with these shareholdings each being worth six-figure sums, and the fund managers hold another £2.6 million.

As regular readers will know, I am not an uncritical enthusiast about all of the investment industry’s massed ranks of independent directors. But EWI and USA’s boards’ personal financial interests are strongly aligned with those of individual investors.

So far as this small shareholder is concerned, that earns these directors more time to see whether SpaceX can create wealth here on earth via the stars. Beam me up, Musky!

All the best online investment platforms now make it easy for shareholders to vote. Failing to do so is demanding to be ignored.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Edinburgh Worldwide (EWI) as part of a globally diversified portfolio of investment trusts and other shares.