65.1% of the total votes cast were against the eight requisitioned resolutions, which would have seen the trust’s board replaced by Saba’s nominees if passed.

A majority of the trust’s total shares with voting rights participated in the vote.

PA Events: PA Live: A World Of Higher Inflation 2025

In a stock exchange announcement, the board said only a further 59,221 non-Saba shares, representing just 0.15% of the votes cast, voted in favour of the resolution.

Saba’s shares represented 34.75% of the total votes cast.

Andrew Joy, chair of Herald Investment Trust, said the result provides a “clear, complete and incontrovertible rebuttal” of Saba’s proposals.

“The votes against Saba’s proposals were supported by independent proxy advisers including Glass Lewis and ISS. It is perfectly clear that the reason Saba’s proposals were rejected is that they were intended to lead to an outcome, namely Saba managing Herald, which the existing shareholders were simply not interested in.

“The reason shareholders invested, and continue to invest, in Herald is for long-term capital appreciation through investing in smaller technology companies, and they do not wish to be deprived of the opportunity to enjoy more of the same. They did not invest in Herald to become part of a short-term trading strategy.”

See also: BlackRock enters pact with Saba to ‘not seek to control or influence the board’

Following the vote, Saba’s Boaz Weinstein said he had been encouraged by the “thoughtful engagement” from fellow Herald shareholders in recent weeks.

“Over a brief period, our campaign has already enhanced value for shareholders and incited positive change at HRI – and elsewhere in the U.K. market – as evidenced by discounts to net asset value narrowing and numerous trusts announcing shareholder-friendly actions.”

He added that Saba would continue to pursue changes it believes are necessary to improve the trust.

“Saba remains committed to putting shareholders’ interests first, delivering returns for UK trust investors and ultimately rehabilitating this broken sector. We urge shareholders of the six other trusts at which we have requisitioned General Meetings to support Saba’s resolutions in order to set these trusts on the path to meaningful value creation.”

‘Victory for shareholder democracy

Reacting to the outcome, Richard Stone, chief executive of the Association of Investment Companies, said: “It’s very encouraging to see Herald shareholders turn out to vote in such numbers.

“This is a victory for shareholder democracy. There are six other trusts with votes just around the corner. It’s vital that all shareholders vote on the future of their investment trust. Shareholders need to act now.”

Voting on similar proposals for the six other trusts requisitioned by Saba will take place over the coming weeks.

Baillie Gifford US Growth and Keystone Positive Change will vote on 3 February, a day before CQS Natural Resources Growth & Income and Henderson Opportunities Trust.

The European Smaller Companies Trust meeting is scheduled for 5 February, before Edinburgh Worldwide shareholders vote on 14 February.

BlackRock gained assurances from Saba that it would “not engage in any takeover offer”, “seek to control or influence the board”, or “seek to change the composition of the board”.

Trusts that made this pact with Saba include BlackRock’s World Mining, Smaller Companies, Energy and Resources Income, and American Income trusts. It will be in effect until 31 August 2027.

BlackRock reached these agreements despite noting that “Saba does not hold any interests in the issued share capital” of any trust.

Yet it may be an effort to protect itself in case Saba attempts to oust and replace its boards, as it has attempted with Keystone Positive Change, Baillie Gifford US Growth, Edinburgh Worldwide, Henderson Opportunities, and CQS Natural Resources Growth and Income, Herald, and European Smaller Companies.

Each of these trusts has urged shareholders to vote against Saba’s proposals, expressing that they are self-serving and are seeking to take effective control of each company.

Keystone’s chair Karen Brade said she was “appalled by Saba’s actions and conduct”.

“Be under no illusion – we believe this US hedge fund manager is acting opportunistically, seeking to seize control of the board without a controlling shareholding, to pursue its own agenda,” she added.

The Association of Investment Companies (AIC) and Edison have gone a step further, raising their concerns directly with the Financial Conduct Authority (FCA) that Saba’s plans are in breach of the UK Corporate Governance Code.

They argue that Saba’s appointment of its own candidates would break rules protecting board independence.

In its governance code, the City watchdog deems a director biased if they “represent a significant shareholder” or have “a material business relationship with the company” – two factors that could work against Saba, considering it owns between 19% to 29% of the shares in each trust.

Analysts at Edison added: “A scenario in which an activist hedge fund is a significant shareholder driving the replacement of the current boards with its proposed directors, and subsequently appointed as the trust’s investment manager, creates a conflict of interest, especially when setting the terms of the management agreement.”

Current chair Jonathan Simpson-Dent took on the role in March 2024 and began a review of the process and management following a period of turmoil for the trust.

Across the past three years, the trust has lost 18.8% in share price total return, compared to a sector average loss of 8.8%, according to the AIC. However, in the past year to 20 January, the trust has a share price total return gain of 31.6%.

See also: AIC raises concerns over Saba with FCA

The trust has also seen a turnaround in its discount, which narrowed from 17.4% in October 2023 to 7.6% in October 2024. This was aided by share buybacks of 14.7m shares for £21.8m, representing 3.8% of the company. As of 20 January, the discount stands at 2.82%, according to the AIC.

Changes to the management of the fund included the appointment of Luke Ward and Svetlana Viteva becoming co-managers alongside Douglas Brodie. The company continues to invest over a quarter of its assets in private companies, including SpaceX.

A requisitioned general meeting will be held on 14 February which could result in the removal of the current board, including Simpson-Dent and the newly-elected Gregory Eckersley.

See also: Saba’s Weinstein fights back at criticism over trust plans

“Edinburgh Worldwide is run solely and independently for you, our shareholders. You have chosen Edinburgh Worldwide for its unique and early access to hidden gems, ground-breaking businesses which in many cases are not available on the public markets. Let’s not let Saba take that away. This is about consumer choice, allowing you the freedom to decide how, where and when to invest your money,” Simpson-Dent said.

“I am deeply troubled by Saba’s proposals. Investment trusts are extremely democratic by construction – Saba’s proposals are not. Saba’s overt land grab for its own end game exploits our long-standing retail Shareholder base, who usually do not vote.”

Over the past year, the US hedge fund has built large positions in Baillie Gifford US Growth; CQS Natural Resources Growth & Income; Edinburgh Worldwide; European Smaller Companies; Henderson Opportunities trust; Herald and Keystone Positive Change investment trusts.

Votes will be held in the coming weeks over Saba’s proposal to replace the boards of each trust with its own directors.

See also: Home REIT publishes overdue 2023 results as board steps down

In a webinar held today (14 January), the Saba Capital founder said that if the firm is successful in replacing the current boards, Saba would seek to merge either some or all of the trusts into a new listed vehicle and invest back into UK assets.

“If we’re given the opportunity, we would launch this Saba product that I think the UK sorely needs, given how every institution has been a seller,” said Weinstein.

“We are the white knight of the UK market. Everyone is a seller, we are a buyer.”

He added: “We are here to not just buy your trusts, we are here to buy billions more and rehabilitate this broken set of trusts and what is – in some ways – a broken industry that hasn’t been able to grow.”

He also took aim at the current boards of the seven trusts, criticising them for poor performance and having a lack of ‘skin in the game’.

Speaking to investors, Weinstein added: “This discount is not some ephemeral thing. It is costing ‘mom and pop’ investors in these trusts enormous amounts of money year in and year out. We are on the same side as you. We are invested alongside of you.”

Meanwhile, he also claimed that Saba’s action has already generated returns for investors with discounts narrowing over the last month.

“My prediction is in the coming three months, many of the trusts that Saba holds will announce shareholder friendly actions that will make you additional hundreds of millions of pounds that you would not otherwise have made because they want to head us off at the pass.

“The entire UK closed-end fund space in general will see smaller discounts, especially if we win and we have this fire power to buy up UK trusts. We’re talking about 83.3% invested outside of the UK that we may bring up to 100% invested in the UK.”

He also criticised aspects of the coverage of Saba’s plans, claiming that information provided by trust boards to shareholders comparing the performance of Saba’s own funds was “blatantly incorrect”.

See also: Update: Saba plans full cash exit option for Herald

Board independence

A large part of the concerns over Saba’s plans has been over the independence of boards, given that Saba is aiming to replace each trust’s board with directors who would be affiliated with Saba.

However, he said that having just two board members would be a temporary measure, with independent NEDs being appointed later on.

Reacting to the webinar, Laith Khalaf, head of investment analysis, AJ Bell, said that if Saba wins some of the forthcoming votes, the investment trust industry may have to prepare for more of the same.

“Whatever the results of the upcoming shareholder votes it will be interesting to see if the arrival of Saba prompts investment trust boards to take more measures to address large discounts,” he said.

“Shareholders will soon get the final say on whether Saba carries the day or not. Investors in each trust need to carefully examine the options and arguments laid out before them, both by Saba and the existing board, before coming to a decision and voting their shares.

The first vote will take place on 22 January, where Herald investors will have the opportunity to either back Saba or the current board.

Last September, the trust’s board set out proposals to fold the trust into the open-ended Baillie Gifford Positive Change fund following a challenging period for performance.

Shareholders were due to vote on the proposals in February. However, it has been postponed until after the outcome of Saba’s requisitioned general meeting.

See also: Update: Saba plans full cash exit option for Herald

Karen Brade, chair of Keystone Positive Change, said due to the size of Saba’s holding in the trust, the board’s proposals for the trust’s future were guaranteed to be voted down.

The requisitioned meeting, at which shareholders will vote on replacing the current board with Saba’s nominations, will take place on 3 February.

Voting on the proposals closes at 12pm on 30 January, or as early as 23 January if invested through a platform.

Keystone has urged its shareholders to vote against Saba’s proposals.

“Unfortunately, Saba waited until 18 December to requisition a general meeting to remove your independent Board and formally inform us that it intends to vote against the scheme, which would guarantee its failure,” Brade said.

“This destructive behaviour highlights just how disingenuous Saba has been and demonstrates its desire to take control of your company.

“In light of Saba’s current voting intentions, the board has decided it is in the best interests of all shareholders to adjourn the scheme meetings to a later date.”

The 100% cash exit would come at 99% of the trust’s total net asset value, which currently sits at £2.5bn.

In a statement, Saba said the cash exit would be overseen by a fully independent board, which would not expect it to occur for at least a year.

The plans to offer a full cash exit come in response to shareholder feedback, the firm said.

The requisitioned general meeting, at which Herald investors will vote on Saba’s proposal to replace the board with their own nominees, will take place on 22 January.

See also: Trusts targeted by Saba campaign urge shareholders ‘take no action’

Herald responds

The Herald board responded to Saba’s announcement, noting that Saba is not proposing to offer 99% of the value of today’s net asset value.

“Instead Saba is proposing an exit after ‘at least a year’ during which open-ended time period significant value could be lost from the underlying portfolio in anticipation or consequence of Saba’s known selling appetite,” the board said in a stock exchange announcement.

They added that the board has engaged with “many shareholders”, who they say have not expressed a wish for Saba to take over the management of the company.

Andrew Joy, Herald chair, said: “Herald has delivered strong investment performance. Since the first day of dealings (21 February 1994) the Company has delivered a 27x NAV total return.

“In direct contrast to Saba’s promise of the “opportunity for greater long-term returns under a new investment strategy”, the Herald Board does not believe that Saba’s long term performance track record supports this.”

See also: IA: UK reinvests in November following two months of exits

Reacting to both announcements, QuotedData head of investment company research James Carthew said that the Herald board’s argument is “straightforward”.

“More worrying to us is the tortured logic in Saba’s statement in which it claims to know what an independent board would do at some point in the future, clearly implying that it believes that it can direct the board’s actions. We cannot get our heads around how a board consisting of Saba employees, Saba appointees, and persons that these Saba-connected directors later co-opt onto the board could ever be construed as independent.

“We iterate our belief that investors should not surrender control of these trusts to this vulture investor. Furthermore, if Saba does seize control and seeks to impose its particular investment approach on the portfolio, investors should be given an exit at NAV, not at a 1% discount.”

If the votes were to go through, the board of the Opportunities trust said there could be a change in the current windup policy, which would remove the option for a full cash exit.

The board today announced a scheme that under the current conditions, would either allow investors to transition their investment to the open-ended Janus Henderson UK Equity Income & Growth Fund or receive the entitlement in cash.

See also: Baillie Gifford: ‘We are appalled by Saba’s actions and conduct’

In Saba’s letter to shareholders on 18 December, it said if the new board members were put in place, they would asses “all go-forward options available to the trusts”, including liquidity events that would offer shareholders “to receive substantial liquidity near NAV”.

Wendy Colquhoun, chairman of Henderson Opportunities trust, said: “Saba is attempting to take control of the Company with no assurances as to what will happen to shareholders’ investments. Saba wants to remove a strong and highly qualified independent Board that acts in the interests of all shareholders and replace it with its own non-independent board that may put Saba’s interests first.

“The Board’s message to shareholders is clear: please exercise your vote and don’t let Saba take unnecessary risks with your money.”

The European Smaller companies trust said that if the board was overtaken by Saba, its plans “indicate that they will not continue to invest in the European small cap sector”. In the past five years, the trust has had a share price total return of 73.6%, compared to a sector average 37.8%.

James Williams, chair of The European Smaller Companies trust, said: “Saba is attempting to take control of your Company by removing a highly qualified, independent board that acts in all shareholders’ interests. It’s clear that Saba’s motives are self-serving. It would like to install directors who would not be independent of the Company’s largest shareholder and has indicated that it may appoint itself as investment manager.

“This could endanger shareholder protections, radically alter the Company’s investment risk profile and deny investors the opportunity to benefit from the proven European small cap investment strategy.

“The Board is therefore recommending that shareholders vote against all resolutions proposed. Saba is counting on a high proportion of shareholders not voting. Investor participation is key and will determine the Company’s future.”

Saba launched a campaign in December to replace the boards of seven investment trusts, claiming that they “have not taken sufficient steps to resolve the trusts’ structural issues, depriving shareholders of superior returns”. It pointed to the narrowing of the trust’s discount since Saba’s building stake in the company. The trust currently trades on a 3.15% discount.

In response to the claims by Janus Henderson, Saba stated: “Over the last three years, Janus Henderson’s ESCT and HOT have both traded at a disappointing ~13.5% average discount to NAV. These respective double-digit discounts demonstrate that the trusts’ boards and portfolio managers have failed shareholders.

“During Chair Wendy Colquhoun’s tenure, HOT shareholders have suffered -40% cumulative underperformance. This disastrous track record is the result of poor investment decisions by the manager and negligent oversight by the board. Janus Henderson’s proposed reconstruction scheme for HOT is inferior to our nominees’ plan and their claim that Saba would seek higher fees at shareholders’ expense if selected as investment manager is made up. Do not be fooled – this scheme is simply a last-ditch attempt to protect the underperforming board, continue lining their own pockets with shareholder capital and distract from an indefensible track record.”

The US hedge fund acquired large stakes in each trust and used its influential position to recommend the complete replacement of both boards, as well as five other UK trusts.

It claimed the move would improve performance, yet Keystone’s chair Karen Brade said Saba’s proposal was made purely in its own self-interest.

“We are appalled by Saba’s actions and conduct,” she said. “We believe its proposed resolutions would be highly detrimental to the interests of all other shareholders.

“Be under no illusion – we believe this US hedge fund manager is acting opportunistically, seeking to seize control of the board without a controlling shareholding, to pursue its own agenda.”

Saba’s plan to replace each board with its own candidates would give it “effective control of the company,” added Tom Burnet, non-executive chair of Baillie Gifford US Growth.

While returns did drop 9% over the past three years, the trust’s board has been proactive in making improvements, with performance soaring 61.7% in the past year.

“Saba wants to subvert all of this,” Burnet  said. “Their proposals lack detail and if implemented, could destroy the board’s independence, radically alter the investment strategy of the company and prove highly disruptive to shareholder value.

“We urge all shareholders to make their voices heard and to vote against Saba’s self-serving and destructive proposals.”

The US activist investor said yesterday (18 December) that it intends to improve poor performance and narrow wide discounts on seven trusts it has stakes in by removing each of their boards.

“We believe the current boards of directors and investment managers have failed to perform versus their benchmarks and have, therefore, required Saba’s investment to narrow the deep trading discounts to net asset value and deliver returns for shareholders,” Saba said.

In response, the boards of Keystone Positive Change, Baillie Gifford US Growth, Edinburgh Worldwide, Henderson Opportunities, and CQS Natural Resources Growth & Income trusts advised their shareholders to ‘take no action’ in votes Saba intends to hold at general meetings next year.

Herald issued no response, while European Smaller Companies acknowledged Saba’s requisition notice but made no recommendation to shareholders.

Performance has suffered and discounts have widened on each of these trusts – which Saba owns between 19 to 29% of the shares in – but QuotedData’s head of investment company research James Carthew said the proposed action is not in the best interest of shareholders.

“Saba’s attack on the UK investment companies industry is entirely self-serving,” he said. “It aims to seize control of these funds to impose its own agenda, book a short-term profit on its investment and then – we suspect – extract management fees from a strategy that investors have shown no appetite for.”

The US hedge fund has requisitioned the boards of Baillie Gifford US Growth Trust, CQS Natural Resources Growth & Income, Edinburgh Worldwide Investment Trust, European Smaller Companies Trust, Henderson Opportunities Trust, Herald Investment Trust and Keystone Positive Change Investment Trust.

Saba, which owns 19-29% shares in each trust, is seeking to replace the boards of each trust. The activist investor said that it believes new boards are necessary to narrow discounts and correct underperformance.

See also: Saba Capital and its intentions for the UK investment trust industry

Boaz Weinstein, founder & CIO of Saba Capital, said in an open letter to shareholders: “Performance demonstrates that they have not taken sufficient steps to resolve the trusts’ structural issues, depriving shareholders of superior returns. While there are multiple levers to narrow these persistent discounts, inaction has been the consistent course of current leadership.”

At each meeting, which Saba said would be scheduled by early February, shareholders of the trusts will vote on removing all current directors of each trust and replacing them with new candidates.

If appointed, Weinstein said the new directors would assess all options available to the trusts, including terminating the trusts’ current investment management agreements and potential combinations with other investment trusts.

Reaction

Saba has been building its positions in investment trusts over the last two years and, after a long wait, it has finally publicly declared its intentions.

Stifel analyst Iain Scouller said: “Overall, we think it is helpful for the sector to have Saba’s game plan revealed and shareholders and boards can now take positions for or against these proposals. We also think given Saba’s significant voting power by the virtue of the size of their stakes, that they will be successful in changing the boards of a number of the trusts involved.

“We think it is now over to the boards of the Trusts to argue why Saba’s proposals should not be supported – they will need to come up with some strong counter-proposals themselves.”

Matthew Read, senior analyst at QuotedData, said that while clarity on Saba’s interests in the sector was welcome, he argues there is an ‘obvious flaw’ in their strategy.

“Saba wants shareholders to replace the current boards and deliver on its plan to ‘quickly deliver substantial liquidity and long-term returns for all shareholders’.

“However, those two are often mutually incompatible, particularly for some of the funds it is targeting where the underlying holdings are less liquid – Herald being the obvious example as it is a big fund with a huge tail of small illiquid positions that trade by appointment that could take years to sell off and you would likely move the market against you in many of these, particularly once the market spots you as a forced seller.”

See also: How do asset managers logistically prepare for major events?

He added that the call for substantial liquidity also ignores the unquoted positions held by trusts such as Baillie Gifford US Growth and Edinburgh Worldwide, while Read questions the logic behind targeting Keystone Positive Change, which is considering folding into its open-ended sister fund.

“This and the other challenges we highlighted above have long made us feel that Saba doesn’t really understand some of the funds that it is invested in,” Read added.

“It is well-documented that Saba has been successful with similar attacks in the US but the UK closed end fund market is fundamentally different. Standards of corporate governance are higher, and returns have generally been better, so this sort of approach makes less sense, particularly now that progress has been made on addressing problems such as the cost-disclosure issues and so discounts are now retrenching.

“It seems to us that their approach is very short-term in nature and this highlights a long running issue that, because many retail investors hold their shareholdings through platforms and do not tend to vote, that large professional investors get a disproportionate amount of the vote.

“This can lead to outcomes that are not in the interests of all shareholders and so we think that it is all the more important that shareholders in these funds make sure their interests are being protected and that they make sure they get out and vote.”

The first question is whether Saba can get other shareholders on side to support its proposals. Norman Crighton, who has served on the boards of eight investment trusts, points out: “The success of any arbitrage depends on the response of the other shareholders. The arbitrager can’t do anything in isolation. They need to convince the shareholders that the alternative is better than the status quo.”

In the US, closed-ended funds don’t have independent boards and have more institutional shareholders. At first glance, this gives activists a significant advantage – a smaller number of shareholders with which to negotiate. In contrast, most UK investment trusts have fragmented, disparate shareholder bases and the largest investors, such as wealth managers, are not always engaged.

See also: Saba Capital and its intentions for the UK investment trust industry

However, resolutions only need to be passed with 50% of votes cast. If a significant number of shareholders don’t vote, these resolutions may pass relatively easily. Ben Conway, head of fund management at Hawksmoor Investment Management, says that voting is difficult for many retail investors. This creates vulnerabilities for trusts, particularly where a lot of their shareholder base invests through platforms.

This has been seen with the European Opportunities trust. The trust has many retail investors, loyal to Alexander Darwall, but Saba still managed to force a small tender offer that it has used to increase its shareholding. It is clearly not finished yet, even though the discount on the trust has narrowed significantly.

Equally, its presence on the shareholder register alone can be enough to galvanise a board into action. Although Saba Capital has not intervened publicly, Keystone increased its share buyback programme and promised a continuation vote in 2027 after it raised its stake to 10%.

There is more merger and acquisition activity within the trust sector – Abrdn, for example, has merged its China trust with Fidelity China Special Situations. Troy Asset Management’s Income & Growth Trust and STS Global Income & Growth Trust have also announced plans to merge. Abrdn New Dawn and Asia Dragon merged in July. Abrdn Japan Investment Trust is being rolled into Nippon Active Value, which has also joined forces with Atlantis Japan Growth. None of these are directly related to Saba, but its presence creates a febrile atmosphere in which boards feel the need to act.  

In general, says Conway, arbitrageurs can be a necessary tool in bringing discipline to capital markets. He characterises them as a little like wasps: “You may not like wasps, but they perform a vital role.”

Narrowing discounts

However, while Saba has had some specific successes, the recent narrowing of discounts across the investment trust sector is more likely to be as a result of some buoyancy in stock markets, the potential for a resolution of cost disclosure problems and clear signs that interest rates have peaked.

While it is difficult to disaggregate the Saba impact, discounts on the Saba-targeted trusts have not narrowed notably more than other trusts. In areas where Saba does not get involved, such as the renewable energy infrastructure trusts, discounts have also moved significantly. For example, JLEN Environmental Assets has seen its discount halve from 30% to 15% since its low in October, Next Energy Solar has moved from 28% to 20% over the same period. For Saba-targeted trusts, Keystone’s discount has narrowed from 18% to 12%, BlackRock Smaller Companies from 15% to 10% and Herald from 17.5% to 12.5%.

Is it possible that Saba will take its wins and head back to the US? Nick Greenwood, manager of the MIGO Opportunities trust, believes this is a possibility: “It is possible that a combination of an improvement in the cost disclosure rules, a pause in interest rates, some improvement in financial market sentiment do the job for it. These are the biggest factors driving the discounts.” The question is whether this will be enough to satisfy Saba. After all, the discount for European Opportunities has narrowed significantly, yet Saba appears disinclined to exit.  

Even if it does exit, there is a worry over what it leaves behind. There is the selling pressure associated with its departure in a range of relatively small trusts. Equally, there is a danger that buybacks reduce the size of trusts at a time when the sector is already struggling with liquidity problems.

However, Conway says some shrinkage may be necessary: “Arbitrageurs usually encourage boards to buyback. In doing so, they leave behind a sector that has shrunk. Discounts are wide, so you do need to increase demand or reduce supply. Demand is falling, so to achieve a reduction in the discount, supply needs to reduce. It may be that the investment trust sector needs to shrink before it can grow.”

This is a view shared by Nick Greenwood: “There has been some oversupply in the investment trust sector, so maybe managers will buyback, or there will be an orderly wind-down of problematic trusts and supply and demand get back into sync.”

A residual problem is that if trusts are smaller, it may make it more difficult for large wealth managers to buy them. This is already a problem for the sector, after significant consolidation among wealth managers. The behemoth created by the Rathbone/Investec deal, for example, may have to deal in lot sizes too big to accommodate investment trusts. Greenwood is more optimistic: “It does assume that the only buyers will be wealth managers, and there are plenty of smaller wealth managers. There are also self-directed investors.”

There is also a chance that Saba Capital reprioritises. The Financial Times recently reported that two of Saba Capital’s funds had lose 7.7% and 8.1% for the year to date in 2023, having been wrong-footed by the rally in markets over the past couple of months. The fund is thought to have some leverage, and it may be that Saba decides to pare back his positions in the UK.

A final problem is that Saba’s intervention doesn’t necessarily get to the trusts that need it most. The fund is only targeting those trusts where it can hedge the underlying investments. That rules out private equity, renewable energy, infrastructure and property, where some of the biggest discounts lie. These trusts will have to rely on a change in market environment to narrow the discounts.

Saba may succeed on its own measures – and it may also benefit from a narrowing of discounts from other factors. However, whether it will help the sector as a whole is open to question. It may galvanise boards to take action and shake-up some sleepy trusts, but as it is generally not targeting distressed trusts or those with the widest discounts, it is not hitting at the point of greatest need.  

Having taken a significant stake, Saba had pushed the board of the European Opportunities trust to offer a full liquidity option at NAV to shareholders at its recent continuation vote. It didn’t get the support it needed, and pressed for a 50% tender offer instead. The board got through the continuation vote by offering a 25% tender offer, which Saba has used to double its shareholding to 10%.

It has not yet publicly declared its intentions in the other trusts, though it appears work may have been going on behind the scenes. Apparently in response to Saba upping its position to 10%, Keystone Positive Change announced plans to buy back shares and set a 2027 continuation vote.

It is disrupting an industry left vulnerable by a series of difficult circumstances. Until recently, discounts on investment trusts were sitting at almost twice their average level, according to the Association of Investment Companies. Part of this has been their own making. As Ben Conway, head of fund management at Hawksmoor, points out: “We get these sorts of investors because we have free markets and that is generally positive. They bring discipline to boards and trusts. These investors couldn’t do what they do if the opportunity didn’t exist. If boards don’t want them on the register, they need to ensure they don’t create the conditions for problems to emerge.”

However, he also admits that the problems aren’t always in the board’s control: “There are problems with the current regulatory and legislative framework, particularly with the rules around cost disclosure.” These rules have seen many wealth managers exit the sector, particularly in areas such as renewable energy, private equity and infrastructure, putting pressure on share prices and widening discounts.

Equally, he says, shareholders are often not active enough to counter this type of arbitrage activity: “Activism takes time and resources. Retail investors are disenfranchised. When it comes to voting, change only needs to happen with 50% of the votes cast and many people don’t vote.” For retail investors, he says, it’s not apathy, but the difficulty of voting. “They have to go to the AGM, get a certificate from their platform. They have to be with a platform that offers it. The act of voting is really difficult.”

Saba Capital is unusual in that it is not targeting the weakest trusts. Instead, it has largely targeted trusts that have had a difficult run of recent performance as interest rate rises have hurt their investment style, but are not ‘problem’ trusts. Manager Boaz Weinstein said in a recent interview with Simplify Asset Management: “I’m interested in funds trading on a discount that have nothing broken about them. That discount could be closed if the manager snapped their fingers and made the closed-ended fund into an open-ended fund.”

Weinstein’s approach is to take pure exposure to the narrowing of the discount. That means taking short positions on the underlying holdings, while taking long positions in the trusts. “With all my closed-ended funds. I’m trying to fully hedge the underlying and make it just about the discount,” he said.

This is why Saba hasn’t targeted the areas with the widest discounts, such as renewable energy infrastructure or commercial property. For these, it is difficult to hedge the underlying assets. Equally, the trust can’t be readily liquidated if Saba forces a wind-up. It could take years to wind up a solar farm portfolio, for example. Nick Greenwood, manager of the MIGO Opportunities trust, says: “Saba is not targeting niche funds such as Georgia Capital. Small caps are at a massive discount to the FTSE 100. It may be making a call on that. However, it may find they are more illiquid than it thinks. They certainly do not trade like the Russell 2000.”

Saba Capital will also need to take a view on the shareholder base and whether it is likely to be able to persuade them to back its actions. “Many shareholders will be in there for a reason. They are buying it to do a job in a portfolio and don’t want to sell,” says Greenwood. This is almost certainly why he hasn’t targeted large trusts such as the F&C investment trust. The underlying holdings may be more liquid, but the process of realising value may be more difficult.

Saba has shown itself to be flexible in the measures it takes to narrow the discount. That may be forcing the board to offer a tender offer, as in the case of European Opportunities trust, or pushing for buybacks to narrow the discount. However, in the US, the group has been prepared to go considerably further in pursuit of its aims, which may be a sign of things to come for the UK investment trust industry.

For example, it recently scored a legal victory, when a New York court sided with the firm in a case against BlackRock over voting rights. Under the Maryland Control Share Act, firms can choose to limit the voting rights of large investor groups to protect the interests of small shareholders. Saba argued that the law stripped shareholders of their voting rights. The court agreed. Weinstein said in a press release: ‘We are pleased to have brought this lawsuit for the benefit of all investors in closed-end funds managed by BlackRock to put an end to the practice of robbing shareholders of their right to vote all of their shares.’

Saba has brought – and won – two previous law suits in the US, against fund managers Eaton Vance and Nuveen. It has also forced funds to convert to open-ended funds. It may also push for mergers. It is noteworthy that Abrdn Smaller Companies Income trust was on its list of holdings earlier in the year, and announced plans to merge with its stablemate, Shires Income, in July.

The hedge fund promises to disrupt the investment trust industry at a vulnerable moment. Whether it can succeed, and whether it will be good for shareholders, is an ongoing question.