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Saba wants to turn investment trusts into hedge funds – that’s not what other investors bought into, but if they don’t vote, they can’t protect their positions.

• Investment Trusts are not short-term trading funds, they build long-term value for patient investors through economic cycles. If their investors wanted hedge funds, they could have invested elsewhere.
  
• These bids aim to profit from UK regulatory failures and inadequate investor protections – can FCA or Treasury step in to protect investors?
  
• Flawed charges disclosure rules, currently being corrected, created significant selling pressure and large discounts since 2021, which Saba is capitalising on.
  
• To succeed, the bids only require a majority of voters, not shareholders, to agree – but as retail platforms don’t have to tell investors about the meetings, many won’t know to vote.
  
• The rationale for these bids shows failure to recognise benefits of patient long-term investing in illiquid growth stocks – to quote: ‘One year is a long time and three years is forever’!
  

The cynically-timed pre-Christmas bids for seven great British investment companies are taking advantage of recent UK market disruptions and inadequate shareholder protections, to gain full control without majority approval. Saba wants to jettison the Boards, replace with its own nominees, install itself as manager – jaw-dropping conflict of interest – and potentially decimate the investment portfolio, selling long-term holdings in favour of short-term trading.

These bids pose an existential threat both to shareholders in each of these companies, and also to the wider investment company sector. For over 150 years, UK investment trusts have enabled ordinary investors to profit from accessing a diversified portfolio of selected companies, which most small investors could not compile on their own. This sector – comprising over 300 companies, worth £270billion and comprising one third of the FTSE250 as well as constituents in the FTSE100 – is one of the crown jewels of UK capital markets.

Investment trusts have evolved from active equity investment strategies into funds investing in sustainable growth and real assets.  Their closed-ended structure has significant advantages for long-term investors over open-ended funds, especially for investments in real assets. As the main home for closed-ended investment companies, the UK has built a deep investor base especially in economically productive long-term, less liquid assets aiming to deliver strong returns for patient long-term investors and boost economic growth, by investing in renewables, infrastructure, real estate and high-growth sectors such as technology and life sciences.

Since 2021, flawed FCA charge disclosure rules have created significant selling pressure and wide discounts, but Saba’s recent buying is not a saviour for shareholders, it just reflects its purchases. Investment trust share prices have been artificially depressed by external factors since 2021, but these are being addressed. For the past 3-4 years (precisely the period selected by Saba to justify its assertion that the funds had failed their investors), UK regulators were driving all investors – institutional and private – to select lowest cost funds. At the same time, new rules and guidance required investors to be told, wrongly, that investment trusts imposed significant charges on their shareholders.  This is absolutely not true. Shareholders are not charged any money by the investment trust at all.  The company itself pays the costs of managing the fund and other associated expenses. This is very different from open-ended unit trusts or OEICs, which do directly charge investors for fund management and administration. But the misinformation created significant selling pressure, weak share prices, large discounts and new investment dried up. Some closed-ended companies have been taken private, some have merged and many have engaged in share buybacks (limiting their ability to invest in promising new projects which urgently need domestic capital commitment).

This market disruption is the background to the Saba hostile bids to hijack these companies. The justification for seeking to remove Directors and change investment managers cites share price performance since 2021, which is an inappropriate yardstick. Firstly, it is too short a period to judge closed-ended investment companies and secondly, it also happens to be a period of market dysfunction. Neither of these factors is mentioned. Several of these investment trusts have good long-term track records and installing hedge fund representatives and investment styles carries obvious risks that the long-term benefits of patient capital will be lost. A portfolio restructuring may be in the interests of Saba, but is unlikely to be best for all other investors. Their funds are being hijacked.

These bids also seek to take advantage of lack of protections for UK retail shareholders, who make up a significant proportion of investment trust shareholder base. The rights of individual investors are not properly protected.  Although in theory investors via retail platforms and nominee accounts have rights to vote, attend meetings and receive information, in practice nobody needs to alert them or provide them with the essential information. As most retail investors hold their shares in nominee accounts or investor platforms, investment trust Boards no longer know who their shareholders are and cannot approach them directly. This has long been recognised as a problem but has not been addressed. ShareSoc, for example, has pointed out this major difficulty when the retail shareholders form a significant proportion of the total shareholders, such as in the case of these investment trusts.

Retail platforms are not obliged to ensure their customers are directly alerted to the votes or meetings. This means many small shareholders may not even know what is happening, putting their interests at particular risk. A majority of shareholders voting in favour is not required to approve such deals. They can go ahead with just a simple majority of shareholders who actually vote.  If many retail investors remain unaware of this vital meeting, the deals could succeed, notwithstanding the clear risks to shareholder interests. Surely, such a fundamental change to their investment interests should require approval by more than just a small minority of investors.

UK shareholder interests are clearly inadequately protected. It may be the case that a minority shareholder could potentially petition the courts for unfair prejudice on the grounds that the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of the majority of shareholders, but this is time consuming and costly and would probably need regulatory backing. Saba’s bids are based on selective short-term investment underperformance and have been taken out of long-term context.

Saba believes ‘3 years is forever and 1 year is a long time’ – that is not an investment trust ethos! The investor presentation seeking to justify its bids, showed that Saba’s investment approach is fundamentally different from that of patient long-term investors in these closed-ended vehicles. They do not seem to have made a convincing case for sacking long-standing management and Directors. A hedge fund may consider long-term performance is irrelevant, but that is just an alternative way of achieving investment success. Many of these funds have seen underperformance in past cycles, but still delivered strong long-term gains, outperforming their benchmarks over longer time periods. They invest in crucial real assets and alternative investments that Government wants supported, but these sustainable growth investments could be lost if the sector can succumb to such takeovers. There is a clear danger that Saba will be able to use its minority position to take over the companies, award itself fees for managing the assets and potentially sell the long-term investments at knock down prices in order to turn these long-term investment funds into short-term trading vehicles. If investors wanted a fund to do short-term trading, they would not be in these investment trusts in the first place.

Closed-ended funds are not well-suited for short-term traders. Having warned about the existential dangers posed by the flawed cost disclosure rules, it is frustrating to see so many good companies under threat. Sadly, the cards are stacked against these retail investors and if they want to keep the type of investment vehicle they originally intended to put their money into, they will need to vote accordingly.