FCA urged to protect retail investment trust investors

The Association of Investment Companies (AIC) has written to the Financial Conduct Authority (FCA) to raise concerns about protection of retail shareholders’ interests follows the attack on seven investment trust companies — including three managed by Baillie Gifford — by activist New York hedge fund Saba Capital Management.

The AIC’s letter focuses on the role of retail investment platforms under the “Consumer Duty” and the importance of board independence for investment trusts.

Association of Investment Companies CEO Richard Stone said: “Following Saba’s action, we are concerned that the current regulations do not protect the interests of retail shareholders.

“Saba is targeting investment trusts with a high percentage of retail investors, so it’s vital they have their say on the activist’s radical proposals to replace the board, change the investment strategy and become the investment manager.

“We are relying on platforms’ support to get this information out to their customers and encourage them to vote. Thankfully they have been broadly supportive of our call for action.

“With so much at stake, the regulator can’t just rely on people doing the right thing. Platforms have important obligations under the Consumer Duty to support their customers’ understanding of Saba’s proposals and any others in the future.

“We believe investors should be automatically opted in to receive communications on corporate actions.

“When significant changes to an investment trust are proposed, platforms should actively contact their clients to encourage voting.

“We want voting to be accessible and made clear and simple for all customers.” 

Saba Capital Management said last month it has requisitioned the boards of seven 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 Saba’s own candidates.

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 says it “holds an interest” in approximately 19% to 29% of each trust’s shares, which Saba says makes it “the largest investor in each Trust.”

On the independence of directors, Stone said: “The FCA needs to urgently explain its views on the independence of directors under the Saba proposals.

“If Saba wins the vote and is proposed as manager, how will potential conflicts of interest be managed?

“The FCA must review the scope of board independence in the Listing Rules.

“Saba’s campaign raises questions about the independence rules if they permit a significant shareholder, who may have a conflict of interest, to effectively select board members – particularly when those board members may go on to appoint that shareholder as the asset manager.”