Investec: Saba trust attack ‘egregious, opportunistic’

Baillie Gifford's current Edinburgh HQ

Analysts at Investec have described the attack by US activist hedge fund Saba Capital Management on seven UK investment trust companies as “an egregious and opportunistic attack” on the funds.

“We see this as ‘greenmail’, pure and simple,” said Investec.

“However, it goes beyond the ‘greenmail’ that Warren Buffet described as ‘odious and repugnant’ in his 1984 shareholder letter.

“In our opinion, Saba is looking to take advantage of a UK closed end industry that is enduring a perfect storm, after an extended and exceptionally strong period, to grow its own AUM.

“Shocking developments at Keystone Positive Change, where Saba has said they intend to block the winding up of the company and an uncapped exit at a 1% discount, should leave UK investors under no illusions about the modus operandi.”

Saba Capital Management 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.

Investec said: “We are deeply concerned about Saba’s proposals on many levels. While the devil is supposed to be in the detail, the latter is conspicuous by its absence.

“Just how are shareholders expected to make an informed decision with Saba failing to provide even basic information on key fundamental issues including their own track record, future portfolio exposure, fee arrangements, liquidity options and discount control mechanisms.

“Do shareholders really believe that they will enjoy the same level of protection if Saba is successful and the current Board is replaced with a two-person Board, consisting of a Saba employee and a Saba nominated appointee?

“Moreover, should Saba’s resolutions pass, for those managing money on behalf of clients who either vote for Saba, or don’t vote given this information vacuum, how do they justify such a ‘leap-of-faith’ action to their clients?

“While Saba hasn’t been shy in lambasting the performance record of ‘the Miserable Seven’, we highlight that since its launch in 2017, Saba’s flagship Closed End Fund ETF has consistently underperformed its own benchmark, with a total return of 124% vs. a benchmark total return of 191.1%.

“We strongly recommend shareholders VOTE AGAINST Saba’s resolutions and send a clear and decisive message.

“Shareholders have one shot, one opportunity to prevent Saba seizing control of their company.”

Investec added: “The proposals suggest a distinct lack of understanding, bordering on contempt, of the AIC Corporate Governance Code which provides a framework of best practice, or of the expectations of current shareholders based on a corporate governance model that has evolved over the long-term.

“The potential conflicts of interest are material and crystal clear. We note that the AIC Code states that representing a significant shareholder is likely to impair a Director’s independence. Do shareholders really believe that the proposed arrangements will provide them with the same degree of investor protection moving forwards?

“The structure of the proposed Boards will bear absolutely no resemblance to anything in the UK closed-end market and Saba appears intent on introducing its own corporate governance model. In the UK, a fully independent Board has been widely regarded as best practice for more than a decade, and non-independent Directors have long been frowned upon by most investors. However, Saba is initially proposing a two-person Board where both Directors are effectively non-independent.

“It is difficult to see how the reconstituted Boards of these companies could observe the Listing Rule requirement that they are able to act independently of the investment manager, meaning that their Main Market listing would be jeopardised.

“Additionally, while the FCA has published Diversity and Inclusion targets, including that 40% of the Board are women, six of the seven proposed Boards will initially be all-male.

“Saba has said that it intends ‘that one or more further independent directors will also be appointed to each Board as soon as reasonably possible following the Trusts’ General Meetings”. In our view, current shareholders are being asked to take a leap of faith here – there is no certainty of appointment or visibility on the calibre or independence of any future Director.

“Why should existing shareholders assume any risk here? Given how critical the independence of any ongoing Board would need to be, why not establish up front (and ahead of the general meetings) who all the proposed directors are?”