Saba ETF to target investment trust discounts

Saba Capital has announced the launch of an exchange-traded fund (ETF) picking targets for activism in the UK investment trust space. 

The Saba Capital Investment Trusts ETF will seek to take advantage of the share price discounts to net asset value (NAV) still persistent in the sector, via a diversified selection of trusts picked based on metrics such as “valuation, liquidity and manager quality”.  

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It should have a portfolio of between 40 and 60 trusts across different asset classes, while Saba said it would continue its strategy of “active engagement”, agitating for corporate actions such as share buybacks, tender offers or any form of restructuring in a bid to narrow the discount.  

However, the fund’s yearly 1.5% fee should raise eyebrows, as may the manager’s track record in the US. That fee puts it notably higher than most actively managed funds, which typically charge 0.85% to 1%.  

The portfolio, and its criticisms 

As with many a newly launched fund, the ETF is mainly in cash for now, with IP Group (LSE:IPO), Syncona Ord (LSE:SYNC) and HarbourVest Global Priv Equity Ord (LSE:HVPE) among its 15 holdings.

The list covers a few other areas, from smaller companies to technology shares, with Allianz Technology Trust Ord (LSE:ATT) a recent positioned disclosed.  

It’s worth noting that none of Saba’s biggest (and most combative) investees are in the ETF for now, with Edinburgh Worldwide Ord (LSE:EWI), Baillie Gifford US Growth Ord (LSE:USA) and Herald Ord (LSE:HRI) all notable by their absence.  

Source: Saba Capital.

Saba has substantial stakes in all these names and has seemingly fought for control of the assets in a number of ways, from voting against the re-election of the USA board last year to seeking, again, to overthrow the EWI board earlier and voting against a tender offer recently put forward by Herald. 

Saba, in launching the ETF, has pointed to the team’s experience of managing similar vehicles in the US, with its Saba Closed-End Funds ETF already focused on taking advantage of discounts.

However, two of its ETFs for US investors, Saba Capital Income and Opportunities, and Saba Capital Income and Opportunities ii, have come under criticism for trading on discounts themselves. 

Both recently felt the brunt of activism themselves, announcing plans to merge in the wake of pressure from a different firm, Gamco Investors, to put a director of their choice on the boards of both funds in the hope of “addressing discount erosion, improving accountability, and advancing shareholder value”.  

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As names such as AVI Global Trust Ord (LSE:AGT), MIGO Opportunities Trust Ord (LSE:MIGO) and Achilles Investment Company Ord (LSE:AIC) can attest, trusts that focus on discounts can see their own shares run into the same problems. 

The move is the latest episode in the lengthy Saba ordeal, and could well enable the activist to gather further assets for its campaign.  

However, this may be a welcome sign for some, given that Saba has managed to trigger exit opportunities at once struggling trusts.

It has also most likely scared many a trust board into taking a more proactive approach to keeping shareholders happy, be it by reducing fees, reviewing a fund’s strategy or even looking at mergers.