Activists target seven UK-listed investment trusts

For those unfamiliar with them, investment trusts are stock exchange-listed companies that invest in portfolios of underlying investments chosen by a fund manager. Investment trusts are overseen by Boards of Directors that are typically independent of the fund manager and with the power to appoint, evaluate and change the fund manager. With the approval of shareholders, investments trusts may also have the authority to borrow money to make new investments (known as ‘gearing’) as well as buy their own shares back.

Unlike ‘open-ended’ funds such as OEICs and unit trusts, where money will come in or out of the fund from day to day as investors buy or redeem their holdings, when investors sell (or buy) shares in an investment trust it may impact the share price, but it won’t require the fund manager to liquidate any underlying holdings to return cash to investors. An investment trust’s share price might not directly reflect the underlying value or performance of the investments it holds (the Net Asset Value) but instead the demand for its own shares. Depending on whether there are more sellers or buyers, investment trust shares can therefore trade at a discount or premium to the NAV of the portfolio. Most trusts typically trade at discounts, but these can both widen and narrow over time. History suggests that buying shares in a well-managed trusts at wider than normal discounts can provide a great opportunity to scoop up a bargain if, over time, that discount narrows.

Over the last couple of years, there has been a widening of discounts across many UK-listed investment trusts, which in part reflects a bigger pattern of investors moving money out of the UK stock market and allocating more to companies listed in the US. Some trusts have been seeking to address this by buying back their own shares (and then cancelling them) to reduce the number of shares traded and in doing so narrow their discounts. Bestinvest’s parent company, Evelyn Partners, has been engaging with many investment trust Boards to encourage them to take actions to narrow discounts.

Trusts trading on discounts can also come to the attention of large investors who might seek to acquire the company, as well as ‘activist’ investors who will take a stake and seek to use their shareholding to effect change.

Over many years, individual UK investment trusts have periodically been targeted by activist investors such as hedge funds. For example, several years ago US firm Elliott Management led a successful campaign at Alliance Trust Plc, one of the largest investment trusts, which had previously been managed by an inhouse investment team owned by the trust and which had traded on a big discount.

Under pressure from Elliott, the Board was overhauled, the in house fund management company was sold, an external fund manager was appointed and a more disciplined approach to buying back shares was put in place.

In another example, in 2015 an activist, Sherborne Investors, won seats on the Board of Electra Private Equity and the following year ousted the Chairman. A strategic review ensued, with Electra’s fund management firm terminating the contract, with the result that the trust was wound-up and assets sold in 2018.

More recently, activists have returned to the investment trust market with US hedge fund Saba Capital Management taking stakes in a number of trusts. In an audacious move in mid-December 2024, Saba requisitioned shareholder meetings at seven investment trusts. In each case they have proposed resolutions to replace the Boards in their entirety with just two Directors nominated by Saba, to switch the management contracts to themselves and to change the mandates of each trust to become funds that would be used to invest in the shares of other investment trusts.

The trusts being targeted, and their stock exchange tickers, are:

• Baillie Gifford US Growth Trust (USA)
• CQS Natural Resources Growth & Income (CYN)
• Edinburgh Worldwide (EWI)
• The European Smaller Companies Trust (ESCT)
• Keystone Positive Change Investment Trust (KPC)
• Henderson Opportunities Trust (HOT)
• Herald Investment Trust (HRI)

In each case, the Boards of the trusts targeted are recommending shareholders vote against these proposals. The common threads in the opposition to the proposals are that the two person Boards being proposed by Saba would lack independence, the proposed changes in mandates would result in entirely different strategies from those currently in place which shareholders chose when investing and that there is a lack of visibility on Saba’s own investment track record. By appointing itself as the investment manager to each trust, Saba would benefit from the management fees but there is no certainty that these would not be increased.

Most of the trusts being targeted have relatively sizeable holdings by private shareholders, who typically do not vote on shareholder resolutions. This means that by voting its own sizeable shareholdings in each trust, Saba could be successful at some or all of these trusts if low numbers of other shareholders’ vote. To illustrate the challenge the incumbent Boards face, last year CQS Natural Resources Growth & Income Plc held a continuation vote. While this was approved by over 99% of the votes cast, only 10.2% of the shareholders registered voted.