US arbitrageur Saba Capital has been investing in the UK investment companies market for a while now. It first came to my attention in June 2021, when it took a significant stake of more than 25% in Crystal Amber (CRS ) and blocked a continuation resolution that needed 75% of shares voted to be approved.

Then in November 2023, it tried to insist that the size of European Opportunities’ (EOT ) planned tender offer be increased from 25% to 50% of its issued share capital, but the board rejected the idea.

Over 2024, we could see it climbing up the registers on a number of trusts, but Saba did not make it clear what it was up to. The mystery was solved on 18 December, when Saba announced it was seeking to replace all directors on the boards of seven trusts with its own appointees.

Saba has been quite transparent about its plans once it seizes control of these companies. It wants to sack the managers and get itself appointed in their stead, knock the trusts together into a single vehicle, and use the new entity to attack other London-listed trusts. Along the way, it says all shareholders will have the opportunity to receive substantial liquidity and exit near net asset value (NAV), if they wish.

Saba suggests it has targeted these trusts because they trade on wide discounts and have underperformed benchmarks. However, to the extent that this is true, the existing boards have been working on shareholder-friendly remedies.

Two of these trusts were already planning to offer a full exit to shareholders. Keystone Positive Change (KPC ) is furthest down this path. It published a circular on 6 December, offering a choice of cash or a rollover into an open-ended fund. Assuming this is approved, shareholders should have cash in the bank by the middle of February. As this was announced well before Saba put in its requisition, we can only guess that Saba hopes to block this deal to impose its own solution.

Henderson Opportunities (HOT ) says it had already instructed advisers to start work on drawing up a plan to offer investors a 100% cash exit and expects to announce this soon. Again, Saba may seek to block this.

Edinburgh Worldwide (EWI ) told investors on 20 November that it was shaking up its investment policy, was committed to handing back £130m of capital to shareholders, and wanted to cancel its share premium account to facilitate this. Investors voted on these proposals on 16 December, and they were approved overwhelmingly (over 99% of those voting).

EWI’s NAV returns have been poor over the past three years. Smaller companies and growth-style investments (excluding AI-linked stocks) have been out of favour. EWI’s fortunes do seem to be changing: over the past six months its NAV is up 18.6%. However, shareholders – me included – are looking for a more pronounced recovery from this area. Saba’s proposals would put an end to those hopes.

Then we have a couple of trusts where Saba has cherry-picked some statistics to fit its agenda.

Skewed choice of index

Herald (HRI ) has suffered from the same underperformance of small cap and growth but is still outperforming one of its performance benchmarks, the Deutsche Numis Smaller Companies plus AIM (ex-Investment Companies) index, by a wide margin – 11.4% for HRI’s NAV over the 11 months to end November, versus 5.2% for the index, and 53.2% versus 14.5% over five years, respectively. Saba, though, chooses to compare it with the Russell 2000 Tech index. HRI’s US investments have outperformed this index by a wide margin in recent years, but the overall NAV has not.

Ironically, I suspect that HRI’s long-term success was one of the reasons that it ended up in this situation. The wave of selling that preceded Rachel Reeves’ Budget, as investors tried to crystallise capital gains, provided the opportunity for Saba to build its stake.

Similarly, Saba compares CQS Natural Resources Growth and Income (CYN ) to the MSCI World Energy Sector index, which CYN uses as it has around 20% of its portfolio in oil & gas stocks, rather than the MSCI World Metals & Mining index, which CYN also uses. The latter index is a better fit with CYN’s portfolio.

Saba also chooses an arbitrary three-year performance measurement period. Over five years to end November, CYN returned 129.2% in NAV terms against 75.2% for the metals and mining index and 72.1% for the energy index. Over one year, the equivalent figures are 7.8% for the trust, and 0.2% and 5.7% for the indices, respectively.

As with small cap and growth, commodities and natural resources are an area that has been out of favour with investors. Saba is taking advantage of natural cyclical weakness to attack CYN, again potentially depriving investors of the chance to participate in any recovery of that sector. CYN has often been the best performing trust in its peer group, and if it survives, it probably will be again.

Then we have Baillie Gifford US Growth (USA ), where Saba seems to ignore the spectacular recovery that the US has seen in its NAV since the US election. Again, it feels as though this recovery is just getting started.

Finally, we have The European Smaller Companies Trust (ESCT ), which is the best performing of all European small-cap trusts over three and five years and second only to Montanaro European (MTE ) over 10 years.

Smash and grab agenda

As things stand, the discounts on these seven trusts are much narrower than they usually are. This is because Saba has been buying aggressively. I feel it is counting on a history of low turnouts at shareholder meetings to impose its smash and grab agenda on these trusts.

I would be deeply uncomfortable being a minority investor in any of these trusts post a Saba takeover. I am also far from convinced that there is appetite for a Saba-run listed fund of funds, or that it would outperform the existing teams if they were left undisturbed. I think that investors are being cajoled into cashing out at or near the bottom of the investment cycle for these investment approaches.

If shareholders step up and make their voices count, this vulture investor can be seen off. But the process of unwinding this situation may still be painful. Saba has backed itself into several corners at once. It can liquidate its stake in KPC and HOT easily enough. However, for the other five trusts, Saba now owns oversized stakes that would take a long time to sell. On the way out, it will probably be the main cause of discounts widening for these trusts. However, I trust the existing boards to manage this equitably and efficiently.

James Carthew is head of investment company research at QuotedData.

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