The Saba Seven Fiasco: A Glimpse into the UK's Investment Trust Landscape
Uncertainty looms for UK Investment Trusts as Saba Seven changes to four: What's the next move?
Investment trusts, often hailed as top stocks to invest in, hold a substantial place in the UK's investment arena. The ongoing saga surrounding Saba's attempts to manipulate seven UK investment trusts has sent shockwaves through the industry. This power play is morphed into its second phase, leaving investors pondering if they should trust investment trusts with their hard-earned money.
The finale of the 'Saba seven' investment trusts' voting spectacle quieted with a muted protest, as Saba Capital's campaign to oust the boards of the seven UK investment trusts fell flat. Following the trend set by the first six trusts, Edinburgh Worldwide's (LON:EWI) shareholders voted a decisive 'no'. Excluding Saba's votes, a whopping 98.4% of the votes were cast against the hedge fund.
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According to Nick Britton, research and content director at the Association of Investment Companies (AIC), the saga "tells us that investors really like their investment trusts. They're prepared to stand up for them and defend them …" Britton further stated that investment trust shareholders demonstrated their dedication by navigating platforms and exercising their voting rights to safeguard their trust's future.
Saba seems to have lost its appetite for the campaign, much like a dejected football fan. With little joy in witnessing repeated defeats, the fund has opted to change its strategy. The revised plan appears to strike at the core of the investment trust model by seeking to convert four trusts, two from the original seven, and two new additions, into open-ended funds.
The move poses several crucial questions. Why did Saba attempt to overthrow the boards of the seven trusts earlier? What do these vote results reveal about investment trust shareholders? And is it still worth investing in investment trusts, or has Saba uncovered flaws inherent to the closed-end model?
The Old Saba Seven Strategy in a Nutshell
Max King's detailed explainer, "Why Saba sees an opportunity in UK investment trusts," delves into the underlying philosophy behind Saba's initial strategy on the seven investment trusts it initially targeted. In essence, Saba exploited the broad investment trust discounts available not only in the US but also in the UK.
After acquiring substantial positions in these funds and trusts, Saba had limited options to maximize profit, other than assuming a fund-of-funds role or attempting to take control of the trusts. Saba's goal in doing so was to address the discounts to net asset value (NAV) at which these trusts traded, assuming that the retail shareholders—particularly those who owned their shares through investing apps—wouldn't exercise their voting rights.
However, this assumption proved to be incorrect, as investment trust shareholders turned out in record numbers to vote on the proposals. This was mainly due to efforts made by the AIC, whose "My share, my vote" campaign mandates that investment platforms make it effortless for shareholders to cast proxy votes via their investing apps.
What's Next for Saba Capital?
As the discounts on the majority of the trusts Saba targeted have narrowed, the fund finds itself unable to cash out swiftly. Selling shares en masse would diminish their value, and reintroduce the discounts. Consequently, Saba needs a strategy to capitalize on the recent gains on its balance sheet.
Taking control of the trusts may have enabled Saba to pursue short-term value-enhancing strategies, or recoup capital at NAV, but shareholders thwarted these attempts. Instead, Saba appears to be focusing on winding up certain trusts and converting them into open-ended funds, namely CQS Natural Resources Growth and Income (LON:CYN), European Smaller Companies Trust (LON:ESCT), Middlefield Canadian Income (LON:MCT), and Schroder UK Mid Cap (LON:SCP).
Saba's latest proposals could offer a one-time liquidity opportunity for investors wishing to sell soon; however, it remains uncertain whether the new funds—even if they retain their present management and strategy—will perform as strongly in the long term as investment trusts would if they remained unaltered.
Investors should carefully analyze and digest all details regarding the proposals when they are made public and cast their votes accordingly.
Is Investing in Trusts Still Worth It?
Saba's ambition to tackle the discount to NAV raises the question of whether investing in funds that trade below their asset value is irrational. This might not always be the case. Closed-ended funds offer numerous advantages for certain types of retail investors, such as tapping into esoteric, illiquid assets and smoothing income over time.
While Saba's open-ended fund proposals might deliver a quick liquidity bonanza for investors yearning to sell promptly, it's unclear whether the converted funds—even if they maintain their existing management and strategy—will thrive in the long term should they remain open-ended, as they would forfeit benefits like gearing and easier access to illiquid assets.
Investors must consider their time horizon and the asset classes they wish to tackle via investment trusts to determine whether such vehicles continue to be an attractive investment option. For illiquid assets like property and private equity, closed-ended trusts might remain the most efficient investment vehicles, despite other strategic advantages.
Ultimately, it is vital that investors of the Saba Four trusts thoroughly scrutinize and digest all details of the proposals when revealed and exercise their voting rights accordingly.
- In light of the Saba Seven saga, investors have demonstrated their dedication to their investment trusts, using voting rights to safeguard their future, as stated by Nick Britton, research and content director at the Association of Investment Companies (AIC).
- Saba Capital, after failing to oust the boards of seven UK investment trusts, is now seeking to convert four trusts into open-ended funds, questioning whether investors still find value in investment trusts or if flaws exist within the closed-end model.
- Despite Saba's attempt to capitalize on discounts in investment trusts, many retail investors remain committed to this type of investment, particularly for accessing esoteric, illiquid assets like property, due to the benefits offered by closed-ended funds.
