By Mark McSherry

New York hedge fund Saba Capital Management said it has requisitioned the boards of seven UK investment trusts “to convene general meetings of shareholders to provide shareholders the opportunity to vote on resolutions to remove the Trusts’ existing directors and appoint highly qualified directors to replace them.”

Three of the seven funds are managed by Edinburgh-based Baillie Gifford.

The funds being targeted are: Baillie Gifford US Growth Trust, Baillie Gifford’s Edinburgh Worldwide Investment Trust, Baillie Gifford’s Keystone Positive Change Investment Trust, European Smaller Companies Trust, CQS Natural Resources Growth & Income, Henderson Opportunities Trust and Herald Investment Trust.

Saba said it “holds an interest” in approximately 19% to 29% of each Trust’s shares.

“Saba is convening the General Meetings because 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,” said the hedge fund.

The boards of the seven investment trusts have described Saba’s proposals to replace all directors with its own candidates as without merit.

The trust boards have recommended shareholders take no action while they draft full responses to Saba’s claims.

Baillie Gifford US Growth Trust said its requisition from Saba proposes that shareholders be asked to consider a number of ordinary resolutions on a poll — to reduce the minimum number of directors, to remove Tom Burnet, Sue Inglis, Graham Paterson, Rachael Palmer and Chris van der Kuyl as directors, and to appoint Boaz Weinstein and Miriam Khasidy as directors of the company.

“The Board considers these proposals to be fundamentally without merit, and in contravention of shareholder interests as a whole,” said Baillie Gifford US Growth Trust.

“A further announcement will be made in due course by the Company accordingly, relating to the posting of a notice of a general meeting and an accompanying circular in which the Board will set out its response in full.”

Baillie Gifford’s Edinburgh Worldwide Investment Trust said its requisition from Saba seeks to remove the company’s six independent non-executive directors and appoint Paul Kazarian and Jonathan Zucker as directors.

” … the Board recommends that Shareholders take no action and await further announcement from the Company which will be made in due course,” said Edinburgh Worldwide.

Baillie Gifford’s Keystone Positive Change Investment Trust said its requisition from Saba seeks to remove the company’s five independent non-executive directors and appoint Paul Kazarian and John Karabelas as directors of the company.

” … the Board recommends that Shareholders take no action and await further announcement from the Company, which will be made in due course,” said Keystone Positive Change.

In connection with its requisitions, Saba issued the following open letter to shareholders of the investment trusts, signed by Boaz Weinstein, Saba’s Founder & Chief Investment Officer:

“Fellow Shareholders …

“We called these General Meetings because the current Boards have failed to hold the investment managers accountable for the Trusts’ wide trading discounts to net asset value (NAV) and their inability to deliver sufficient shareholder returns.

“Saba holds an interest in approximately 19% to 29% of each Trust’s shares, making us the largest investor in each Trust, aligning our interests with yours and giving us the right to requisition the General Meetings. We believe that the Boards have not minded the trading gap, which is why we want to offer you the opportunity to elect new directors with a concrete plan to deliver shareholder value.

“Saba’s Strong Track Record and Views on the U.K. Investment Trust Industry

“Investment trusts first caught my eye as an individual investor more than two decades ago, early in my career at Deutsche Bank. I was drawn to the inconsistency: while some trusts traded near fair value, others were stuck at a yawning discount. This discrepancy fascinated me. I saw an opportunity to apply techniques from my institutional markets experience to a space largely driven by small investors. It was the perfect arena to combine my analytical skills and passion for navigating the odds, whether as an investor, blackjack card counter or chess master.

“Today, it’s a core strategy for us at Saba Capital, as we seek to help millions of individual investors realize significant value. What has caught my attention for the past three years is that the U.K. trust industry’s discounts have deepened as a consequence of investors losing faith in managers after shockingly poor performance in certain trusts. At the same time, the boards have not held those managers accountable.

“Saba prefers private engagement with the boards of the trusts we invest in, but underperformance, persistent trading discounts and disengaged management teams leave us no choice but to act. The value creation opportunities are vast when trusts are overseen by skilled managers and boards operating with best-in-class governance. This is why we believe change is urgently needed at these Trusts.

“As one of the world’s single-largest investors in investment trusts, Saba has a track record of pursuing changes that return discounted trusts to their full NAV and create long-term value for shareholders. We have negotiated dozens of shareholder-friendly corporate actions – such as tenders, share buybacks, restructurings and discount management plans – and changes to investment approaches in investment vehicles where shareholders had previously suffered from prolonged poor performance and subpar management.

“With our industry expertise, we have identified a clear path forward to transform these Trusts and deliver greater shareholder value than under the current Boards and respective investment managers, as outlined below.

“Mind the Gap: Why Saba Believes New Boards Are Necessary to Correct Underperformance

“Saba is concerned that the current managers’ and Boards’ inability to mind the gap between each Trust’s trading price and NAV has destroyed significant value for shareholders. It is important to note that the Trusts’ discounts to NAV have narrowed significantly over the last six months. We consider this to be a direct result of Saba building our total stake in these Trusts to £1.5 billion. Without such buyer demand or the prospect of active steps being taken to improve returns to shareholders, there is a risk of the Trusts’ share prices falling and discounts widening again if we are unsuccessful in our pursuit to reconstitute the Boards of the seven Trusts.

“As evidenced in the chart below, the Trusts have also delivered underwhelming, and in some cases disastrous, total shareholder returns (“TSR”) compared to their respective benchmark indices during the last three years …

“The takeaway is clear: the Trusts’ managers and their directors have failed 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.

“Saba’s Resolutions: Reconstitute the Trusts’ Boards with Exceptionally Qualified Directors

“The current Boards’ failure to hold management accountable for the Trusts’ poor performance has left us no choice but to take the extraordinary step of requisitioning a General Meeting for each of the seven Trusts. To swiftly capitalize on the significant upside opportunity for all shareholders, we have requested that each Board conduct its General Meeting as soon as possible and expect that all General Meetings will be scheduled, at the latest, by early February 2025.⁴

“At each of these meetings, shareholders will have the opportunity to vote on two critical resolutions (the “Resolutions”) proposed by Saba to 1.) remove all current directors of the Trusts, and 2.) appoint new, highly qualified candidates to replace them.

“By fully reconstituting the Trusts’ Boards, we believe that we can unlock greater value for shareholders and address the long-term structural issues that have hamstrung the Trusts’ return potential under current leadership. Each of the director candidates shares a deep commitment to improving shareholder returns and putting your interests above their own …

“The Plan: Deliver Substantial Liquidity & Long-Term Returns for Shareholders

“We have identified a clear path forward to transform these seven Trusts and deliver greater value than you could otherwise realize under the current Boards and managers. Our plan is simple: with a reconstituted Board, we intend to provide shareholders with long-overdue liquidity options alongside the opportunity for greater long-term returns under a new investment strategy and manager.

“If appointed, the new directors will transparently assess all go-forward options available to the Trusts, including:

• Offering liquidity events, including tender offers and share buybacks, so that all shareholders immediately have the opportunity to receive substantial liquidity near NAV, if they wish.
• Terminating the Trusts’ current investment management agreements.
• Replacing the Trusts’ current investment managers.
• Refocusing the Trusts’ investment mandates on purchasing discounted trusts and/or combining them with other investment trusts, where appropriate, to realize scale benefits and synergies.

“The Opportunity: Unlock Value with a Proven Investment Manager

“Saba has seen demand from investors to bring a product similar to our CEFS exchange-traded fund, which actively invests in discounted closed-end funds, to the U.K. market. This campaign answers this call.

“At each Trust where shareholders pass our Resolutions, the Board will be changed immediately, and each newly appointed Board will consider the optimal investment strategy and manager going forward. If a new Board, in accordance with its fiduciary duties, decides to proceed with replacing the existing manager and introducing a new investment policy, we anticipate the following process:

• The anticipated notice period of three months (EWI, KPC), six months (CYN, ESCT, HOT, USA) and 12 months (HRI) for each investment management agreement will be followed.
• If the Board of a Trust decides to proceed with the termination of any existing investment management agreement, new arrangements will be considered and put in place prior to its expiry.
• We intend to propose Saba as the new investment manager to each of the Boards for their consideration.
• If a Board ultimately decides to vote on the appointment of Saba, Mr. Weinstein and Mr. Kazarian will recuse themselves from voting on Board decisions related to Saba.
• To ensure compliance with the highest standards of governance, it is intended that one or more further independent directors will also be appointed to each Board as soon as reasonably possible following the Trusts’ General Meetings.

“If the director candidates are appointed, they intend to first assess options to provide shareholders the opportunity to achieve substantial liquidity near NAV if they do not wish to remain in a Trust with a new investment manager and mandate. If a newly reconstituted Board selects Saba as the new investment manager, we intend to deliver attractive terms and greater value to shareholders by shifting the Trusts’ investment mandates to focus on purchasing discounted trusts consistent with our successful strategy at CEFS, as investors have consistently called for.

“Vote “FOR” Saba’s Resolutions at the Upcoming General Meetings

“As shareholders, you deserve an investment that provides reliable returns, Boards that advocate for your best interests and managers that are focused on delivering enhanced value.

“If you are ready for positive change, then we strongly urge you to vote in favour of the Resolutions as we firmly believe they are the only credible, long-term way to earn outsized returns on your investment. Saba believes that passing all the Resolutions is in the best interests of each Trust and its shareholders. Accordingly, Saba will exercise all our voting rights in favour of each Resolution at the Trusts’ General Meetings.

“We look forward to continuing this dialogue with you and appreciate your consideration. We are available to discuss our Resolutions and our campaign to #MindTheGap.

Sincerely,

Boaz Weinstein
Founder & Chief Investment Officer, Saba Capital”