As the shareholders of seven requisitioned trusts head for the ballot box, Stifel has warned that even if activist Saba Capital is defeated, the votes could represent just one battle in a drawn-out war.

New York-based Saba Capital has shaken up UK investment trusts, turning a spotlight on performance and persistently wide discounts.

Having built up hefty stakes of between 19% and nearly 30%, the hedge fund called for general meetings at seven trusts in late December, including Baillie Gifford US Growth (USA ) and two other trusts run by the Edinburgh fund firm. 

Herald (HRI ) becomes the first trust to defend itself against Saba’s resolutions to replace the board – setting itself up to take over as manager of the £1.2bn listed fund – when it asks shareholders to vote on its future tomorrow.

The next three weeks will decide the fate of all the trusts, but Stifel investment companies research chief Iain Scouller said what happens after the votes is ‘the more important issue’ for the industry.

Scouller expects Saba to win the votes at ‘two or three trusts’ due to the low turnout of retail investors, but it will ‘not be the end of the matter’ for the trusts that are victorious.

Due to Saba’s large shareholdings, Scouller said ‘some sort of exit mechanism will be required’ to appease the activist investment firm led by Boaz Weinstein, which may have a plan B in the event it does not win.

The Stifel analyst predicted the two most likely outcomes from a failed vote will be further requisitions and an immediate large tender offer from the trust.

Even if Saba does lose, its large stakes mean it could make further requests for general meetings in the future, including calling for cash exits at close to net asset value (NAV). Further requisitions could also see the activist call for new board members to be added that are more ‘sympathetic’ to its cause, providing it with increased control.

A large tender offer could also be used to placate Weinstein, providing liquidity and a ‘conventional’ exit close to NAV.

‘While we assume Saba would find this as an attractive exit, other shareholders may decide to remain in the trust for continued exposure to the portfolio and perhaps may be reluctant to sell if it means crystalising a capital gains tax charge,’ said Scouller.

However, an outsized tender offer does bring with it the risk of shrinking a fund rapidly and possibly making it ‘unviable in future’.

A conditional tender offer could also be put on the table, if a trust is performing well and the discount is relatively narrow. That would see the board promising a cash return to shareholders if performance falls below the benchmark over a certain time period.

‘Saba may take some comfort from knowing it has an exit if the trust underperforms or the discount widens significantly [but] it is difficult to know if they would be happy to retain the shares for such a time period and we think it is much more likely Saba demand more immediate cash exits,’ said Scouller.

Out of nine potential scenarios outlined, Scouller identified the prospect of Saba simply selling down its stakes in the market or via placements as highly unlikely.

A way out

Saba has already had plenty of success in getting UK trusts to offer shareholders a way out. In September Keystone Positive Change (KPC ) proposed a wind-up with a full cash exit at a 1% discount to NAV, or option to roll-over into the Baillie Gifford Positive Change open-ended fund.

It was followed by Edinburgh Worldwide, which proposed a £130m capital return and a shake-up of its investment strategy.

Three more targeted trusts followed in January, with Henderson Opportunities (HOT ) offering a full cash exit at NAV or roll-over into the Janus Henderson UK Equity Income and Growth fund, while stablemate European Smaller Companies (ESCT ) proposed a three-year performance-related tender for up to 15% of the share at a 2% discount to NAV, alongside its active buyback programme.

CQS Natural Resources Growth and Income (CYN ) is also evaluating the scope for measures such as buybacks or a tender, offering a full cash exit, or merging with another trust.

In an excoriating webinar last week, Weinstein criticised the trusts for taking no action to benefit shareholders until Saba joined their share registers. He said the measures were ‘not out of the goodness of their hearts’ but a move to ‘protect their wallets’.

US success

Saba has long been a scourge of underperforming listed funds in the US and just because its focus has turned to the UK, that hasn’t let American funds off the hook.

Today, it reached agreements with BlackRock for the asset management giant to undertake cash tender offers on two closed-end funds with a combined $3.6bn (£2.9bn) of assets. The pair will tender 50% and 40% of their shares, respectively, at 99.5% of NAV following a Saba campaign that started last March.

Weinstein used X, formerly Twitter, to declare the tenders ‘a monumental outcome for shareholders’, adding that the offer shows ‘there is a path to a win-win outcome for managers and shareholders’.

‘By committing to shareholder-friendly initiatives, liquidity events and governance enhancements, value can be unlocked for all investors,’ he said.

Sources have suggested that Saba could channel the proceeds from such wins in the US towards adding to its stakes in UK investment companies.