Cristian Angeloni (pictured), special projects editor at Investment Week
As the financial services world was getting ready to shut their laptops, bring out the mince pies and get ready to celebrate the Christmas holidays and the New Year, US-based hedge fund Saba Capital had different plans in mind, as it unveiled some last-minute activism to end an ever-eventful 2024 with.
On 18th December 2024, the activist investor requisitioned general meetings for seven investment trusts it is a shareholder of, to bring about change to their investment objectives and oust their current boards, lamenting poor performance and stubborn discounts.
The trusts in question are: Baillie Gifford US Growth; CQS Natural Resources Growth & Income; Edinburgh Worldwide; European Smaller Companies; Henderson Opportunities; Herald, and Keystone Positive Change.
Unsurprisingly, the decision rocked the investment trust space and forced the respective seven boards to begin the new year on somewhat of a war footing, vehemently urging shareholders to vote against the resolutions put forward by Saba.
All trusts but one – Edinburgh Worldwide – have now set the dates for their respective general meetings between 22 January and 5 February to vote on the activist investor's resolutions.
Saba saga 'should come as no surprise' and serves as 'a wakeup call to boards' no matter the outcome
But one of the most peculiar parts of the plans put forward by Saba is not only the removal of all seven boards, but for them to be replaced by a two-director board comprising a Saba representative and one independent director appointed by the hedge fund.
Even though most investment trusts have boards of at least three to four directors, the issue is complicated by the fact that the activist investor intends to become the designated investment manager of all seven trusts, if successful in the general meetings.
This could bring forward compliance issues for Saba, as the independence of a trust board is codified in the Financial Conduct Authority's Listing Rules.
In Chapter 15, which focuses on closed-ended investment funds, it has a whole section about the expectations for a trust board and its independence.
Section 15.2.11 states that the board of directors or equivalent body for the fund "must be able to act independently" of the investment manager and/or a master fund if it invests in such vehicles.
Investec denounces Saba plans and 'shocking' turn on Keystone windup
Additionally, section 15.2.12-A sets out that the chair of an investment trust board must be independent and so must the majority of the board.
As such, Saba's plans of having a two-director board, with one being a direct representative of the hedge fund, could potentially make it difficult for the activist investor to comply with the FCA rules.
Saba founder and CEO Boaz Weinstein would be the investor's representative on the Baillie Gifford US Growth trust, and Paul Kazarian, Saba's principal executive officer for publicly traded trusts, would have the same role for the remaining six.
This could bring up issues of ‘overboarding' – where a director sits on several boards at the same time – Annabel Brodie-Smith, communications director at the Association of Investment Companies told me.
The AIC Corporate Governance Code's ‘Division of responsibilities' chapter states that "non-executive directors should have sufficient time to meet their board responsibilities".
As such, Kazarian's ability to have sufficient time to fulfil his duty to shareholders while sitting on six different boards could be called into question.
When I asked Saba about such plans and their potential lack of compliance with the Listing Rules, the group told me that, if its nominees are elected, "the board of each investment trust will be legally compliant at all times under the FCA Listing Rules and will ensure compliance with the highest standard of governance".
The activist investor added that it also intends to comply with the AIC Corporate Governance Code "as soon as practicable" if its resolutions are passed and, as a result, it plans to appoint "one or more additional independent non-executive directors with suitable experience".
But it wasn't just Saba's plans to replace the current directors with a two-person board that sparked questions over the independence of the potential future boards.
On Thursday (9 January), Saba unveiled plans to offer an exit strategy for shareholders of the Herald investment trust after a year, at 99% of net asset value – the only trust such an offer has been made for among the seven in question.
Following the proposals, James Carthew, head of investment companies at QuotedData, accused Saba of having a "tortured logic" in claiming to know what an independent board would do in the future
Carthew called the plans "worrying", and argued they clearly imply that Saba "believes it can direct the board's actions".
He added: "We cannot get our heads around how a board consisting of Saba employees, Saba appointees, and persons that these Saba-connected directors later co-opt onto the board could ever be construed as independent."
Baillie Gifford trusts slams Saba for wanting to make 'self-serving and destructive changes'
However, what seems clear(er) is Saba's intention to have ‘carte blanche' on the seven investment trusts if it gets the necessary votes at the respective general meetings.
Both AIC's Brodie-Smith and Deutsche Numis analyst Ewan Lovett-Turner agreed that Saba's actions appear to be an effective attempt to seize control of the boards and the investment management and objectives at each of the trusts.
Now the ball will be in shareholders' court, having to decide whether to back Saba or the current boards of directors.
Although it must be considered that the activist investor holds sizeable holdings in the vehicles, ranging from 18.6% to 29.2%, meaning it has significant voting power.
Even if it is successful, Saba will have to answer to shareholders for most of the changes it plans to make.
Herald investment trust hits back at Saba over attempt to oust its board
This is because, even though it will not require their approval to be appointed investment manager, it will require their permission to make material changes to the trusts' investment strategies, as shareholders are entitled to have a say in the investment direction of the fund.
This is because some may have bought into the trust due to the current investment strategy and philosophy and, should they change significantly, investors may not wish to continue holding the vehicles in their portfolios.
That is why the AIC has urged shareholders of the seven trusts to really understand what Saba is proposing; to assess whether they are satisfied with the level of independence of the directors put forward by the activist hedge fund due to its intention to become investment manager, as well as whether the changes proposed to the investment strategy align to their own.
A big shout out must go to Investment Week reporter Linus Uhlig, who has been at the forefront of the coverage of the ‘Saba saga' – and yes, in case you're wondering, the IW team is very fond of alliterations.
This article was first published as part of the Friday Briefing series, which is available exclusively to Investment Week members each week. Sign up here to receive the Friday Briefing to your inbox each week.
