Saba saga 'should come as no surprise' and serves as 'a wakeup call to boards' no matter the outcome

Founded in 2009, the Manhattan hedge fund Saba Capital, created and still led by Boaz Weinstein, is renowned for its highly activist shareholder measures.

Saba has a long history of building up positions in close-ended investment vehicles, according to experts.

This reputation has "definitely been at the forefront of the minds of boards, particularly the ones [Saba] has been building up big stakes in in recent months", according to Emma Bird, head of investment trust research at Winterflood Securities.

Baillie Gifford trusts slams Saba for wanting to make 'self-serving and destructive changes'

A source familiar with the latest matter told Investment Week: "Anyone can look up Saba and it is not too hard to find out the way it operates.

"Saba is not here as a confidence vote for your manager, it is here because people did not want your fund. They are selling it to Saba for a 20% discount, and now it is the voice of those displeased shareholders," the source added.

The story so far

Saba has been increasingly adding to its positions in UK investment trusts for years, and disclosed its exposure to at least 35 trusts in January last year.

At a time when the investment trust sector has endured a period of heavy discounts and challenging performance, Saba worked to build its share in several of these trusts, before launching an attempt in December to oust the boards of seven UK investment companies.

On 18 December 2024, Saba published a letter calling for general meetings at Baillie Gifford US Growth trust (USA); CQS Natural Resources Growth & Income (CYN); Edinburgh Worldwide investment trust (EWI); European Smaller Companies trust (ESCT); Henderson Opportunities trust (HOT); Herald investment trust (HRI) and Keystone Positive Change investment trust (KPC) with the view to remove the current boards and replace it with its own nominated directors.

Saba claimed the current boards have failed to hold the investment managers – Baillie Gifford, Janus Henderson, Herald Investment Management and Manulife - accountable for the trusts' wide discounts to their respective net asset value (NAV).

At the time, Weinstein's fund argued the current boards and chairs should be removed due to "their inability to deliver sufficient shareholder returns".

Saba holds between 19-29% of the shares in each trust, making it one of the largest investors in each investment company, thereby meaning it is "likely to have a strong hand in these upcoming votes", according to analysts at brokerage and investment banking firm Stifel.

In the December open letter, Weinstein said: "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," he added.

Weinstein also set up an external website dedicated to their campaign with the mantra "MIND THE GAP" splashed across the pages, and released a post with the same phrase on social media site X, formerly Twitter, the day before his company sent out the open letter.

Should Saba be successful in the upcoming votes, the firm's partner and portfolio manager, Paul Kazarian, would be installed as one of two new directors on every trust's board, other than USA.

Kazarian would be joined by a plethora of other individuals as the second director in each of the six trusts, with candidates ranging from former Goldman Sachs and Barclays employees to other private equity and investment heavyweights.

At USA, Weinstein, a former Deutsche Bank trader and experienced blackjack player himself, would be joined by the ex-Clifford Chance lawyer Miriam Khasidy, who specialised in capital markets during her legal and consulting career.

Trust board pushback

Saba's strategy has been met with significant scepticism and strident language by the boards of all seven trusts and the wider industry.

Almost immediately, the boards from the pair of Janus Henderson trusts and the Baillie Gifford trio in Saba's crosshairs issued scathing critiques of the plans proposed from across the Atlantic by their largest shareholder.

Henderson Opportunities' board said it "does not believe these resolutions are in the best interests of shareholders and will be advising shareholders to vote against them".

The boards of Baillie Gifford's USA, Keystone Positive Change and Edinbugh investment trust also stood firm.

Saba to offer exit strategy for Herald investment trust shareholders if vote passes

USA slammed Saba for its proposals that were "fundamentally without merit" and said the changes would be "in contravention of shareholder interests as a whole".

Earlier in January this year, USA also accused Saba of wanting to make "self-serving and destructive changes to the company", as it compelled its shareholders to vote against Saba's proposals at the general meeting set to take place in Edinburgh on 3 February.

Tom Burnet, non-executive chair of the trust, said: "Shareholders who invested at IPO in 2018 have nearly tripled their initial investment. Further, the growth outlook for our portfolio companies is extremely strong."

However, according to Burnet, "Saba wants to subvert all of this".

The largest of the seven trusts on the hit list, Herald investment trust, said Saba's attempt to seize control of the trust's board risks "potentially destroying value for all shareholders".

Its board also slammed the Manhattan hedge fund's actions as "opportunistic", a view echoed by James Carthew, head of investment companies at QuotedData.

"Saba's attack on the UK investment companies industry is entirely self-serving. 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," said Carthew.

Winterflood's Bird added that, for many of the boards, the issue is that Saba "does not seem to be requisitioning in the interests of shareholders". Instead, "they seem to have ulterior motives," she argued.

Weinstein and Saba have repeatedly hit back at the trusts for their comments. Last week, the CEO said that the manager of Herald, Katie Potts, must be held accountable for the trust's returns over the past three years.

He said while Potts "has delivered strong returns over most of her three-decade tenure managing HRI, we are now in 2025 and the board must be held accountable for the trust's exceptionally poor returns during the last three years".

He added that, given its large standing in the trust's retail ownership, "it is absurd to suggest that we would favour a fire-sale of the very assets in which we are the single-largest shareholder".

"We fear the recent progress made on the narrowing of the discount will be reversed if shareholders do not support Saba's campaign to reconstitute the board with new directors who will truly mind the gap," Weinstein said.

Herald's general meeting on 22 January in London will mark the first of the seven trusts' meetings, with others set to follow on the 3,4 and 5 February.

Investment Week understands that Saba will be attending all seven of the meetings in London and Edinburgh.

Saba's strategy and wider hedge fund activism

Since the letter was released last month, Saba has retained the notion that it is acting in the interests of shareholders to narrow the discount to NAV at which the trusts have been trading and to increase liquidity in the vehicles too, a claim that has been met with mixed response.

AIC calls on retail platforms to spread awareness of 'vital' Saba general meetings

"I think essentially their playbook is to gain big stakes in various closed-end funds, requisition the board and nominees on the board, and then eventually be appointed as the manager, and then convert those closed-end funds or own them in a different fund as a manager, and manage that as an additional pool of capital to continue their ongoing hedge fund strategy," said Bird.

A focus on closed-ended funds is one Saba's core strategies, alongside its tail hedge approach and flagship credit relative value strategy.

Typically focused on fixed income in the form of predominantly high yield bonds and loans, Saba also notes that it "selectively pursues an activist approach where corporate actions may be an effective tool to unlock shareholder value and monetise the discount to NAV".

Saba's strategy, though, differs somewhat from other major activist investors and hedge funds that have muscled into the closed-end fund space in recent years.

In 2017, US activist hedge fund Elliott Investment Management ended its bruising tussle with Dundee-based Alliance trust, one of Britain's oldest investment managers, which saw the former gather enough support from fellow shareholders to successfully oust then CEO Katherine Garrett-Cox and shift to a multi-manager model.

Elliott, spearheaded by billionaire Paul Singer, had built up a 19.75% stake in the centuries-old trust in an attempt to change how it was run and narrow the discount, a position that Alliance eventually bought back in January 2017.

Last year, news emerged that Elliott had built a 5% position in Baillie Gifford's Scottish Mortgage (SMT), the second largest investment trust in the world, again with the attempt to improve the trust's performance.

Saba also has a position in SMT.

Sources explained to Investment Week that many activist hedge funds including Elliott, Third Point Partners, Starboard Value and Bluebell Capital Partners, which is currently closing down, often buy into close-ended funds purely for liquidity and aim for a quick exit.

One source familiar with the matter mentioned that activists will typically undertake significant due diligence before investing in a closed-ended strategy, and these hedge funds must fundamentally like the underlying assets in the portfolio.

They explained that there is typically collaboration between the activist hedge fund and the board to narrow the discount because many of these hedge funds think that trusts should not trade at a discount.

According to these sources and QuotedData's Carthew, this where Saba's strategy varies.

"It is different. What Elliott wanted to do was create a situation where you get liquidity at a narrow discount, but it was not trying to force an agenda on the board," said Carthew.

Baillie Gifford's Budden agreed, adding that "buying things on discounts and then going to the board and agitating to get the board to do something is a perfectly legitimate approach to investing".

However, Budden noted there were multiple continuation votes in which Saba could have voted against them but decided not to, which the boards began to think was strange.

He said that "although Saba launched this campaign as though it was just trying to tackle the discounts and provide liquidity, the clear message of what it is trying to actually do is get hold of the management contracts of these funds so that it can establish a UK listed form of what it has got in the States".

Saba is well-versed in this type of hedge fund activism.

Indeed it won Institutional Investor's Activist Hedge Fund Manager of the Year in 2023 and 2024.

Last year, it made efforts to remove BlackRock as the investment adviser at five closed-ended funds, but was unsuccessful.

Pair of Janus Henderson trusts set date for general meetings requisitioned by 'self-serving' Saba

At the time, Glenn Hubbard, chair of the boards of the BlackRock closed-ended funds, said: "For the second year in a row, Saba has failed to convince shareholders that Saba will deliver more value than the funds' current stewardship and management team.

"We continue to believe that the governance of closed-end funds, in comparison to operating companies, is fundamentally different and requires specific protections against assembly-line activism," Hubbard added.

Performance disputes

Despite this, Saba's public communication has continued to focus heavily on addressing the underperformance of the seven trusts under fire.

Herald (HRI), which has a strong long-term track record of over 2,600% in terms of net asset value total return since its inception in 1994, has endured a challenging few years.

When Comparing HRI's performance to the Saba Closed-End Funds ETF (CEFS) over one, three and five years, the Saba mandate has outperformed over each period, making 28.8% versus 19.7% in net asset value return over the former. Over three years, CEFS made 46% compared to -9.7% and 79.1% versus 48.5%, respectively, according to data provided by Saba from Bloomberg accurate to market close on 31 December 2024.

Since CEFS' 21 March 2017 inception, it has also narrowly outperformed HRI, returning 128.7% compared to the latter's 123%.

Moreover, Bloomberg data showed that during the last three years, all seven trusts have retained an average discount to NAV of between 12% (Keystone) and 14.7% (HRI).

Data from the Association of Investment Companies and Morningstar also showed that the seven trusts have tussled with their discounts for the past three to five years.

However, they have also enjoyed periods during which they have traded at a premium and almost all of the seven have seen their discounts narrow in recent months.

Still, Saba said: "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."

The source familiar with the issue added: "Saba does need liquidity. It is not here to own this fund for the next five years. Maybe a year, two years, maybe three years to figure it out."

The private assets and liquidity factor

However, according to some analysts, gaining liquidity will not be immediately achievable.

"There does not seem to be any evidence of experience in this field," said Baillie Gifford's Budden.

Baillie Gifford: Saba critiques are 'fundamentally without merit'

"The other thing you have to bear in mind is that these unlisted holdings come with conditions and rights and restrictions as to their liquidity. You cannot sell them in the way that you can public equity," Budden noted.

Carthew echoed this view and explained that although you can hire in the private market expertise, he would be concerned about the areas that require more understanding.

"If you think about the Herald portfolio, or even, European Smaller Companies, you cannot liquidate those portfolios at NAV in a hurry, it just cannot happen. And if everyone knows you are a seller, it is going to be quite hard work. It is going to take time, and it is probably going to destroy value," he said.

Carthew said this is because it is often more challenging to gain immediate liquidity from smaller cap companies compared to larger cap stocks.

Despite this, the source insisted that Saba is "a big multi-strat hedge fund with a lot of smart people".

"Selling SpaceX is not that challenging," they said, adding: "I guess you can make arguments that Saba would lack the expertise or sophistication to do something like that, but it is a pretty big hedge fund with a lot of smart people. I do not think it is beyond them".

What comes next?

With meetings set for late January and early February, letters have been sent out to shareholders of some trusts with large print on the front urging them to get out and vote to prevent Saba from "destroying" the trusts.

Saba's next moves are dependent on its success in these votes, analysts have noted.

"I think if [Saba] wins the requisitions on three or four, it will use the assets it gains to change the strategy […] and use it to continue their investment in the UK investment trust market, looking at heavily discounted funds and gaining the uplift," said Bird.

One of the sources familiar with the matter told Investment Week: "I think the trusts are fearful that they could lose this one and there could be a new vehicle out there buying more of their trust at 15% discount to NAV."

The source added: "Saba has a $7bn book of these investment trusts growing with multi-$100m dollar mandates, so I do not think it would have a hard time."

Saba has exposure to at least 35 UK investment trusts, with closed-ended funds accounting for just under 32% of Saba Capital Income & Opportunities' portfolio, as of 31 October 2024.

The hedge fund has attempted to woo shareholders of Herald with a commitment for a 100% cash exit at 99% of NAV in 12 months' time, an offer that has received significant pushback from the trust and analysts for its lack of commitment to an exit at the current NAV.

Janus Henderson investment trust boards push back in the face of Saba criticism

Major retail investment platforms have also been urged by the AIC to ensure their customers are aware of the upcoming general meetings.

The AIC chief executive Richard Stone said "investors need to understand the details of what is being proposed by Saba, including changes to the trusts' boards, strategy, manager or fees". He continued: "They need to consider whether the investment trust would still meet their needs, as well as any potential tax implications."

The existence of Saba's current ETF vehicle has also spouted rumours that the hedge fund could look to roll any investment trusts it takes over into an ETF.

However, according to Carthew, this would be difficult because "the portfolios are too illiquid".

He added: "I would be surprised if they can keep the discount on a UK version of their ETF down to close to asset value."

BlackRock's Hubbard explained that activist hedge fund influence must be a warning to the sector of its vulnerability. "These proxy campaigns have illustrated just how vulnerable closed-end funds are to a single, vocal, deep-pocketed activist, whose point of view on the funds' strategies and governance does not align with other shareholders and their investment objectives," he said.

While boards have expressed that they have remained attentive in addressing their discounts to NAV, Ben Yearsley, director at Fairview Investing, said "there has been a great deal of complacency in the trust sector".

"While I would not necessarily want Saba to succeed in what they are doing, I think it is good for the sector in the long term - a kick up the arse," Yearsley argued.

Winterflood's Bird echoed this sentiment, noting the 'Saba saga' has "definitely been a wake-up call to the boards of how they need to manage their discount to NAV".

IW's source argued that the UK investment trust sector is currently "a cushy space, where the managers are doing well".

"The fees of these funds are higher than they would be in an ETF. The board members are career board members, and someone needs to come and shake it up," the source continued.

Questions of board independence: Saba

If Saba is successful, the Manhattan hedge fund's employees would have at least one seat on the boards of the seven trusts, which has thrown the ability for the boards to retain their independence into question.

Saba has said "each investment trust will be legally compliant at all times under the FCA Listing Rules and will ensure compliance with the highest standards of governance". It also committed to following the AIC's Code of Corporate Governance "as soon as practicable".

Friday Briefing: Saba isn't being a bully, there is a point to activism

Despite this, Yearsley claimed that the boards "would not be independent, which is quite key".

"Without the non-executive directors looking after investors' interests, I would not want to invest. If Saba gets these and then changes the boards, these are uninvestable," the Fairview director argued.

As Bird said, "there is much better governance in the UK investment trust market". "I think that is probably why they have done this group requisition which probably worked better in the US."

Across the pond, trustees (members of the board) can sit on multiple investment companies advised by the same investment manager and be employees of that manager.

As the general meetings roll around, the investment trust industry has issued a rallying cry for shareholders to exercise their right to vote, with respective trusts' websites plastered with pleas to vote against Saba's proposed changes.

According to Darius McDermott, director at Chelsea Financial Services, "shareholders must unite and vote to safeguard their future".

"It is also incumbent on platforms to alert their shareholders and outline the potential outcomes and their voting rights. Inaction is our biggest enemy."