The investment trusts in Saba’s sights: what it means for investors

Saba Capital’s Boaz Weinstein at New York Public Library. Photo: Gary Gershoff/WireImage.

Investment trusts have had good news this year, in the form of substantial share price rises and shrinking discounts to net asset value (NAV). After several years of fighting for survival, the sector is showing signs of recovery.

But a disruptive force remains in the form of Saba Capital. The US activist investor’s actions could still have plenty of repercussions, good and bad, for shareholders.

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The real drama began around 10 months ago, when Saba kicked off a campaign to overthrow the boards at seven trusts and take over.

Saba lost all seven votes but has not stopped there, continuing to build up stakes in struggling trusts and agitating for change.

The investor is still a decent presence on a host of targets old and new. Saba is also looking to run an exchange-traded fund (ETF) that will invest in trusts domiciled in the UK, Guernsey and Jersey, echoing a strategy it uses in the US.

Having Saba in a trust isn’t necessarily bad for shareholders: it can result in an exit at close to NAV or prompt other action, from fee reductions to shifts in investment strategy.

But it can also prove disruptive for those who want to stick by a struggling trust.

The current targets

Saba must tell the market when it builds a stake of 5% or more in a trust (or when its position falls below that threshold). The table, based on data provided by Winterflood on 16 October, shows a selection of these and when the last update had been provided to the market.

This list comes with a few health warnings. Saba has sometimes initiated a position only to exit it a few days later, meaning certain names could rapidly exit this list.

This table is therefore a snapshot in time, highlighting some recent activity. We have also excluded a few names, from Middlefield Canadian Income, which has converted to an ETF following a Saba campaign, to names such as Crystal Amber Ord (LSE:CRS) which are in the process of winding up.

Some names in the list have only recently become known as Saba targets. One prominent example is Smithson Investment Trust Ord (LSE:SSON), the £1.6 billion trust applying the investment process behind Fundsmith Equity to the global smaller companies universe.

The team likes to back small and mid-cap names showing “strong profitability that is sustainable over time and generating substantial cash flow that can be reinvested back into the business” and seeks to avoid overpaying for such shares.

Fund manager Simon Barnard was recently interviewed by interactive investor. You can watch the interview via the links below.

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But it has had a rocky ride with shareholders enjoying a return of just 0.4% over the five years to 27 October, and Saba recently unveiled a position of around 14%.

Meanwhile, plenty of equity trusts, including some original targets from when the US activist starting circling UK investment trusts around two years ago, can point to a significant Saba presence on their shareholder register.

Herald Ord (LSE:HRI), Baillie Gifford US Growth Ord (LSE:USA) and Edinburgh Worldwide Ord (LSE:EWI) fought off the activist earlier this year but are potentially stuck with it for some time, unless they can provide an exit via the likes of a tender offer.

Saba could still shake up these trusts. It nearly managed to remove the USA board earlier this month, when it used a 29% stake to vote against the board’s re-election at the trust’s annual general meeting. The board said it will “again seek to engage with Saba to understand their position”.

Saba also has decent positions in the likes of Schroder UK Mid Cap Ord (LSE:SCP), BlackRock Throgmorton Trust Ord (LSE:THRG) and Impax Environmental Markets Ord (LSE:IEM), with plenty of positions below 10% elsewhere.

Is Saba a good thing?

The investment trust world might bristle at its presence but Saba has arguably driven plenty of positive change.

Plenty of its targets, from CQS Natural Resources G&I Ord (LSE:CYN) and The European Smaller Companies Trust PLC (LSE:ESCT) to the now disappeared Keystone Positive Change and Henderson Opportunities, have offered investors a way out via mechanisms such as tender offers or full liquidations.

Saba has also forced the trust sector to worry more about whether shareholders are happy. Take Schroder UK Mid Cap, which has cut its fees, introduced an updated share buyback policy and introduced a regular continuation vote, for one.

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Or the fact that swathes of trusts have introduced fee cuts this year, while buybacks, mergers and strategic reviews have picked up.

But investors do need to think twice about whether they should back campaigns for a trust to wind up, given that some of these names are on a cyclical low and waiting for a recovery.

CQS Natural Resources & Income is a good example: it could have been liquidated earlier this year, had Saba won its initial campaign. Had that happened, shareholders would have missed out on the huge recovery of recent months.

That thinking could apply to many names in this list: smaller companies, for one, have struggled in recent years but could be due a comeback.

Alternatives

What’s interesting elsewhere is that, having previously targeted equity trusts, Saba has extended its reach into less liquid, “alternative” asset classes, disclosing positions in renewable energy infrastructure funds SDCL Efficiency Income Trust plc. (LSE:SEIT) and Gore Street Energy Storage Fund Ord (LSE:GSF), Life Science REIT Ord (LSE:LABS) and “growth capital” play Molten Ventures Ord (LSE:GROW).

This marks a pivot from Saba’s initial campaign, which predominantly targeted trusts invested in listed equities, with Saba founder Boaz Weinstein suggesting their holdings were easier to value.

In January, he told the author of this piece, in the Investors’ Chronicle’s IC Interviews podcast: “We tend to stay public unless we can get a good handle on what the private valuation is.” He argued that SpaceX, which features prominently in USA and EWI, was an exception in being “very easy” to value.

Saba declined to comment on the move into alternative assets but the move may relate to the fact that discounts have narrowed significantly for equity sectors.

As the second table shows, equity trust sectors have generally tended to look less ‘cheap’ than alternative asset funds, purely based on the share price discounts available. We have excluded private equity from this list, given that most trusts trade on big discounts but the huge premium on 3i Group Ord (LSE:III) skews the average.

To look at recent Saba stakes, SDCL Efficiency Income traded on a discount of around -33.2% on 27 October, with Gore Street Energy Storage on -38.6% and Life Science REIT on -43.2%.

“One of the things I wondered was whether they had run out of targets in the equity space,” said James Carthew, head of investment company research at QuotedData.

“If you buy stuff on a sub-10% discount you don’t have the same force of argument and people aren’t as bothered. It’s harder to get the groundswell of support. The magnitude of the uplift is less, too.”​​​​​​​

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Investors in alternative trusts might welcome the sight of Saba, given they could spur some positive measures. Note that Gore Street Energy Storage, which had already been feuding with another activist, recently announced an “accelerated” plan to change its board, with other initiatives such as asset sales aimed at “improving performance and increasing momentum”.

Saba may find fewer easy wins in alternatives, given that the assets are harder to sell and such trusts will find it tougher to find liquidity to fund measures such as tender offers. And once again, backing the activist could mean missing out on a future recovery.