EQi Explains: Saba Capital and UK investment trusts   

The UK investment trust sector has been rocked recently by the largely unwanted attention of activist investor, Saba Capital. 

Saba is a hedge fund run by New York financier Boaz Weinstein which sought to exploit a sector that had suffered because of tough financial regulation and a wider sell-off of UK equities.  

This resulted in large numbers of investment trusts trading at a ‘significant discount to NAV’ – in a nutshell, at a share price that valued each company at less than the total market price of the basket of investments it held. 

Many trusts bought back their own shares to bolster their share price, but average discounts in 2024 were still 15%. 

Mr Weinstein saw the opportunity to target funds with improving asset values and narrowing discounts and initially chose seven trusts in which he had built significant holdings, including those operated by Baillie Gifford and Janus Henderson (‘The Saba ‘raid’ on 7 UK listed investment trusts’). 

His strategy was to acquire more than 10% of each trust’s voting share capital, then seek to oust the existing board, install two of his own directors and then appoint Saba as the investment manager. 

Saba’s pitch to investors was that it could ‘unlock value’ by offering them a way to cash out at a value much closer to NAV; tempting if your trust is trading at a deep discount. 

However, questions were raised as to what would happen next – who would run the trusts, what would be the investment strategy, and could Saba’s team actually do a better job?  

How did shareholders respond?

The characteristically genteel world of investment trusts mobilised to take full advantage of the voting structure (‘How to vote at investment trust general meetings’) and rejected each of Saba’s advances, with barely 2% of independent shareholders backing them. 

This was seen as a strong show of support for the existing management teams and the long-term investment strategies they employ. 

However, Weinstein has not given up on his bold plans to shake up the UK investment trust sector promising change and better value for investors, saying ‘underperformance, persistent trading discounts and disengaged management teams leave us no choice but to act’. 

Saba’s ‘Mind the gap’ campaign argued that the trusts’ performance gaps compared to their benchmarks is unacceptable and it prompted industry body the AIC to counter with its own campaign ‘My share, my vote’. 

The hedgies’ revised plan will be to try to persuade investors in four ‘underperforming’ trusts to adopt an open-ended structure; watch this space. 

If nothing else, this episode should serve to reinforce the need for investors to make sure they fully understand the nature of the investments they are making, and to that end there is a wealth of information to be found elsewhere on this site, and at DIY Investor. 

In addition, there is plenty of good content on the AIC site – ‘Investment Companies: Understanding premiums and discounts’ is good entry level content, and there’s lots more from our friends at Kepler Trust Intelligence.