Having put forward proposals to seven UK investment trusts during December 2024, Saba Capital called for a general meeting with each of the Boards to decide their fate. These investment trusts include: Herald Investment Trust, Baillie Gifford US, CQS Natural Resources Growth & Income, European Smaller Companies, Henderson Opportunities Trust, Keystone Positive Change and Edinburgh Worldwide.
Following Edinburgh Worldwide’s general meeting on Friday 14 February, all seven of the investment trusts have rejected Saba’s proposal to oust the current Board and replace them with Saba appointed directors in what has been considered a record voter turnout at each general meeting.
And now, the further announcement from Mind the Gap campaign of Saba’s intention to requisition the Boards of CQS Natural Resources, European Smaller Companies, Middlefield Canadian Income and Schroder UK Mid Cap to propose to transition each of these trusts into an open-ended structure to eliminate the discount.
This has been considered one of the biggest shake-ups in the UK investment trust sector.
Quill PR has asked the opinions of some of the leading investment trust managers and commentators: Ben Conway, Head of Fund Management & CIO of Hawksmoor Investment Management; Peter Walls, Fund Manager of Unicorn Asset Management; and Peter Hewitt, Fund Manager of CT Global Managed Portfolio, on why this happened and why it’s important.
Question 1: Do you think that UK investment trusts can learn from this, and is there a way to protect against such aggressive strategies?
Ben Conway, Head of Fund Management & CIO at Hawksmoor Investment Management commented: “Yes, there is plenty both Boards and investment advisers (managers) can learn from this. The best way to prevent activists like Saba from appearing on one’s register is to prevent the opportunity from appearing in the first place. Discounts, even on portfolios of liquid securities, had become too wide and too persistent. Boards should have been enacting more measures to narrow discounts. The most obvious of these are share buybacks – which should have been enacted sooner and in greater size. I would not look too kindly on any reactive initiatives designed to prevent activist shareholders from appearing on registers. Any changes should benefit all shareholders – and close discounts by increasing demand. Anything that attempts to exclude a certain type of investor from a register is not good governance. The analogy we like to use is the wasp. No one wants a wasp at their picnic, but without them, our ecosystem collapses. Activists are an essential part of a healthy investment trust ecosystem: they provide discipline.”
Peter Walls, Fund Manager of Unicorn Asset Management, said: “Saba’s ultimate strategy will only become clear towards the end of this saga but so far it looks like a hybrid model. Traditional activists and arbitrageurs look to buy as many shares as possible at the widest possible discount and then agitate for change. It’s been going on for decades, aided by the development of ever more sophisticated and liquid financial instruments.
“Of course, the best way to protect against such strategies is not to let your shares trade at a tantalising discount in the first place and to ensure that your shareholders remain loyal when times get tough. Neither of these tasks are always particularly easy as markets, investment styles and investor sentiment are all cyclical. And for Investment Companies with illiquid underlying investments the challenge is often greater (although the potential for arbitrage may be less).
“I’m not inclined to support the idea of introducing protections against certain large investors as that would go against the whole idea of shareholder democracy.”
Peter Hewitt, Fund Manager for CT Global Managed Portfolio, commented: “Firstly, I think it’s important to note that this was not an attempt by Saba Capital to help improve the trusts and help close the discount. This was more of an attempt to gain the management of these trusts. They had no support in this endeavour by anyone outside of their organisation as it was pretty clear that their proposal would benefit no one but Saba.
“To prevent this kind of action from happening in the future, investment trusts will need to close the discount gap. The Board of Directors and management must be more alert about their trust’s discount and be more rigorous in closing it. It is true that the discount in the investment trust sector has widened quite a bit, which formed the basis of Saba’s proposal. In 2021, the average sector discount was at 2% and now it is at 16%.”
Question 2: How do you think the investment trust industry will change?
Ben Conway, Head of Fund Management & CIO at Hawksmoor Investment Management commented: “ ‘Relevancy’ is the watchword for us. Is the trust relevant? Trusts that lack relevancy will not see demand for their shares return and thus the current crisis is existential for them. Ultimately, a Board needs to be sure that the trust is offering something that cannot be offered in other forms. The most obvious type of trust at risk is that which invests predominantly in liquid listed equities. Such a strategy can be replicated in daily dealing in open-ended fund form (offering greater liquidity to the investor without the discount volatility of trusts). The use of gearing is not sufficient to justify their existence. We believe the trust structure is best utilised to access less liquid securities – both smaller listed equities and assets such as property, infrastructure, ships and private equity to name a few.”
Peter Walls, Fund Manager of Unicorn Asset Management, said: “The sector has faced so many headwinds in recent years (I think we are all familiar with these!) that change was already afoot as referenced by the record share buy-backs and other corporate actions seen in 2024. This trend has continued into 2025 with announcements of more rigid discount controls (Finsbury Growth & Income for example), redoubled share buy-back activity (Harbour Vest Global Private Equity) and other measures to dampen discount volatility.”
Peter Hewitt, Fund Manager for CT Global Managed Portfolio, commented: “The industry will have to cross the Rubicon and realise that their trust will become smaller if they want to close discounts and ensure their shareholders are happy. To do this, they will have to issue share buybacks.
“To make a difference to discounts, the quantum of the buybacks must be materially different and not just one-offs – you can make a difference on discounts through sensibly managed buyback policies. Not a lot of trusts want to do this because it will shrink the trust and they fear that private wealth will not be interested in them if they are too small. But what they have to realise is that it’s necessary if they want to keep their trust and get the right rating and share price.
“If this was taken onboard, you would have a smaller sector but there would be a lot less discount volatility, which would arguably be more attractive for potential buyers such as private wealth managers and multi-asset funds. Saba has thrown a light on this which we might be thankful for in the fullness of time.”
Question 3: Saba claimed that the UK investment sector is broken, do you think they’re correct in this?
Ben Conway, Head of Fund Management & CIO at Hawksmoor Investment Management commented: “I don’t think “broken” is the right word. I would say “in crisis” – but the challenges the sector faces aren’t insurmountable. Demand for investment trust shares is impaired as a result of three main headwinds: cost disclosure rules, wealth management consolidation and sub-standard governance. Whether the sector is in cyclical or structural decline is largely academic if the cycle takes too long to turn up! I think there is a deep pool of potential demand that should be marketed to with far greater alacrity (except for a few investment managers who I know are at the vanguard of such initiatives) – and that is the DC pension fund industry. The trust structure is in many ways superior to the LTAF in accessing illiquid assets. It would be a shame if DC pension funds invested only in LTAFs to access such assets. Even then, LTAFs could and perhaps should invest in investment trusts. Either way, demand from traditional cohorts of investors has collapsed and will not return soon. If it is not replaced, the supply side will have to do the work, and that means shrinkage.”
Peter Walls, Fund Manager of Unicorn Asset Management, said: “Absolutely not. Leaving aside that the sector has stood the test of time through every possible conceivable scenario the Investment Company structure remains that most appropriate corporate entity for long term investment, particularly in less liquid specialist areas of investment. Those willing to take a truly long view have been well rewarded by investing in the sector and I have every confidence that will continue to be the case.”
Peter Hewitt, Fund Manager for CT Global Managed Portfolio, commented: “I think that it is obvious as to why Saba would think that. Inflation and interest rates were rising and there was an absence of buyers, which could not supply demand for shares, so of course discounts for certain trusts were going to widen. But there’s not a lot you can do to combat this, it’s not easy to fight against pretty important macro trends. However, I wouldn’t say that the UK investment sector is broken, but it could improve in some areas.
“Aside from closing the gaps on discounts through continuous share buyback options, I think that Boards need a better understanding of the investment trust structure. Because investment portfolios invest in a whole variety of areas, such as equities, bonds, commodities etc. they are all wrapped up and called investment trusts. Whilst the Boards of investment trusts want to do the right thing generally, they often have expertise in many different investment areas but lack expertise in the management of the investment trust structure. Expertise in this area is paramount as they would be able to make more effective decisions to run the investment trust, such as the use of marketing strategies and how to handle discounts.”
Question 4: AIC has launched its ‘My Share, My Vote’ which seeks to end poor practices among some investment platforms and providers, such as failing to pass on voting rights and information, charging customers to vote, and declining to vote shares even when requested to do so. Do you agree with the AIC ‘s solutions and that it should be mandatory for platforms to notify investors about voting rights unless they opt out? Also, should this become part of Consumer Duty?
Ben Conway, Head of Fund Management & CIO at Hawksmoor Investment Management commented: “I am fully supportive of the AIC’s campaign here. It should absolutely be part of Consumer Duty that platforms play a greater role in enabling shareholder engagement. In fairness to some retail platforms, their business models enable very low-cost custody and trading of investment trust shares. We should not necessarily expect costs to stay as low if more demands are made on them. It is not just retail platforms to blame. Some institutional platforms simply charge far too much to enable voting and it would be healthy if a light was shone on pricing practices there.”
Peter Walls, Fund Manager of Unicorn Asset Management, said: “All in favour of all shareholder voices being heard but not so keen on mandating. Following the unbelievable damage wrought by the cost disclosure fiasco over the last 5 years I strongly believe that Investment Companies should continue to abide solely by the existing rigorous listed company rules and there is no justification for becoming embroiled in Consumer Duty legislation.”
Peter Hewitt, Fund Manager for CT Global Managed Portfolio, commented: “Yes, it should most definitely be mandatory. Shareholder voting rights are incredibly important when it comes to running a trust, they can decide the future of it, as we have seen from the voting results of Saba’s proposals. From my experience, Interactive Investor is one of the best at this. When it comes to your voting rights, they contact you immediately when a vote is about to take place and provide all the necessary details. The importance of voting rights cannot be overstated.”
It seems that the investment trust sector is united in its response to Saba’s campaign against the UK investment trust industry and on ways to improve the sector that does not include ousting the Board of several respectable investment trusts.
It will be interesting to see how Saba fares in its Mind the Gap campaign. But what is clear to see is that Saba Capital is here to stay in the near future.
McKinley Sadler is a Senior Account Executive at Quill PR.