Saba Capital Management has announced that it has requisitioned the boards of directors of Baillie Gifford US Growth Trust USA), CQS Natural Resources Growth & Income (CYN), Edinburgh Worldwide Investment Trust (EWI), European Smaller Companies Trust (ESCT), Henderson Opportunities Trust (HOT), Herald Investment Trust  (HRI) and Keystone Positive Change Investment Trust (KPC) to convene general meetings of shareholders to provide shareholders the opportunity to vote on resolutions to remove the trusts’ existing directors and appoint qualified directors to replace them. Saba is convening the general meetings because it believes the current boards and investment managers have failed to perform versus their benchmarks and have, therefore, required Saba’s investment to narrow the deep trading discounts to net asset value and deliver returns for shareholders.

In connection with its requisitions, Saba today issued the following open letter, which is outlined in full below:

On behalf of Saba Capital Management, L.P. (together with certain of its affiliates, “Saba” or “we”), I am writing to inform you that we have requested the Boards of Directors (the “Boards”) of seven investment trusts (listed below) convene general meetings (the “General Meetings”). The seven trusts are Baillie Gifford US Growth Trust PLC, CQS Natural Resources Growth & Income PLC, Edinburgh Worldwide Investment Trust PLC, European Smaller Companies Trust PLC, Henderson Opportunities Trust PLC, Herald Investment Trust PLC and Keystone Positive Change Investment Trust PLC (collectively, the “Trusts”). We called these General Meetings because the current Boards have failed to hold the investment managers accountable for the Trusts’ wide trading discounts to net asset value (“NAV”) and their inability to deliver sufficient shareholder returns.

Saba holds an interest in approximately 19% to 29% of each Trust’s shares, making us the largest investor in each Trust, aligning our interests with yours and giving us the right to requisition the General Meetings. We believe that the Boards have not minded the trading gap, which is why we want to offer you the opportunity to elect new directors with a concrete plan to deliver shareholder value.

Saba’s Strong Track Record and Views on the U.K. Investment Trust Industry

Investment trusts first caught my eye as an individual investor more than two decades ago, early in my career at Deutsche Bank. I was drawn to the inconsistency: while some trusts traded near fair value, others were stuck at a yawning discount. This discrepancy fascinated me. I saw an opportunity to apply techniques from my institutional markets experience to a space largely driven by small investors. It was the perfect arena to combine my analytical skills and passion for navigating the odds, whether as an investor, blackjack card counter or chess master.

Today, it’s a core strategy for us at Saba Capital, as we seek to help millions of individual investors realize significant value. What has caught my attention for the past three years is that the U.K. trust industry’s discounts have deepened as a consequence of investors losing faith in managers after shockingly poor performance in certain trusts. At the same time, the boards have not held those managers accountable.

Saba prefers private engagement with the boards of the trusts we invest in, but underperformance, persistent trading discounts and disengaged management teams leave us no choice but to act. The value creation opportunities are vast when trusts are overseen by skilled managers and boards operating with best-in-class governance. This is why we believe change is urgently needed at these Trusts.

As one of the world’s single-largest investors in investment trusts, Saba has a track record of pursuing changes that return discounted trusts to their full NAV and create long-term value for shareholders. We have negotiated dozens of shareholder-friendly corporate actions – such as tenders, share buybacks, restructurings and discount management plans – and changes to investment approaches in investment vehicles where shareholders had previously suffered from prolonged poor performance and subpar management.

With our industry expertise, we have identified a clear path forward to transform these Trusts and deliver greater shareholder value than under the current Boards and respective investment managers, as outlined below.¹

Mind the Gap: Why Saba Believes New Boards Are Necessary to Correct Underperformance

Saba is concerned that the current managers’ and Boards’ inability to mind the gap between each Trust’s trading price and NAV has destroyed significant value for shareholders. It is important to note that the Trusts’ discounts to NAV have narrowed significantly over the last six months. We consider this to be a direct result of Saba building our total stake in these Trusts to £1.5 billion. Without such buyer demand or the prospect of active steps being taken to improve returns to shareholders, there is a risk of the Trusts’ share prices falling and discounts widening again if we are unsuccessful in our pursuit to reconstitute the Boards of the seven Trusts.

As evidenced in the chart below, the Trusts have also delivered underwhelming, and in some cases disastrous, total shareholder returns (“TSR”) compared to their respective benchmark indices during the last three years.^2,3

The takeaway is clear: the Trusts’ managers and their directors have failed shareholders. Performance demonstrates that they have not taken sufficient steps to resolve the Trusts’ structural issues, depriving shareholders of superior returns. While there are multiple levers to narrow these persistent discounts, inaction has been the consistent course of current leadership.

Saba’s Resolutions: Reconstitute the Trusts’ Boards with Exceptionally Qualified Directors

The current Boards’ failure to hold management accountable for the Trusts’ poor performance has left us no choice but to take the extraordinary step of requisitioning a General Meeting for each of the seven Trusts. To swiftly capitalize on the significant upside opportunity for all shareholders, we have requested that each Board conduct its General Meeting as soon as possible and expect that all General Meetings will be scheduled, at the latest, by early February 2025.⁴

At each of these meetings, shareholders will have the opportunity to vote on two critical resolutions (the “Resolutions”) proposed by Saba to 1.) remove all current directors of the Trusts, and 2.) appoint new, highly qualified candidates to replace them.⁵

By fully reconstituting the Trusts’ Boards, we believe that we can unlock greater value for shareholders and address the long-term structural issues that have hamstrung the Trusts’ return potential under current leadership. Each of the director candidates shares a deep commitment to improving shareholder returns and putting your interests above their own.

We have proposed to replace the full Board of each Trust with the director appointees set out in the following table:

The Plan: Deliver Substantial Liquidity & Long-Term Returns for Shareholders

We have identified a clear path forward to transform these seven Trusts and deliver greater value than you could otherwise realize under the current Boards and managers. Our plan is simple: with a reconstituted Board, we intend to provide shareholders with long-overdue liquidity options alongside the opportunity for greater long-term returns under a new investment strategy and manager.

If appointed, the new directors will transparently assess all go-forward options available to the Trusts, including:

• Offering liquidity events, including tender offers and share buybacks, so that all shareholders immediately have the opportunity to receive substantial liquidity near NAV, if they wish.
• Terminating the Trusts’ current investment management agreements.
• Replacing the Trusts’ current investment managers.
• Refocusing the Trusts’ investment mandates on purchasing discounted trusts and/or combining them with other investment trusts, where appropriate, to realize scale benefits and synergies.

The Opportunity: Unlock Value with a Proven Investment Manager

Saba has seen demand from investors to bring a product similar to our CEFS exchange-traded fund, which actively invests in discounted closed-end funds, to the U.K. market. This campaign answers this call.

At each Trust where shareholders pass our Resolutions, the Board will be changed immediately, and each newly appointed Board will consider the optimal investment strategy and manager going forward. If a new Board, in accordance with its fiduciary duties, decides to proceed with replacing the existing manager and introducing a new investment policy, we anticipate the following process:

• The anticipated notice period of three months (EWI, KPC), six months (CYN, ESCT, HOT, USA) and 12 months (HRI) for each investment management agreement will be followed.
• If the Board of a Trust decides to proceed with the termination of any existing investment management agreement, new arrangements will be considered and put in place prior to its expiry.
• We intend to propose Saba as the new investment manager to each of the Boards for their consideration.
• If a Board ultimately decides to vote on the appointment of Saba, Mr. Weinstein and Mr. Kazarian will recuse themselves from voting on Board decisions related to Saba.
• To ensure compliance with the highest standards of governance, it is intended that one or more further independent directors will also be appointed to each Board as soon as reasonably possible following the Trusts’ General Meetings.

If the director candidates are appointed, they intend to first assess options to provide shareholders the opportunity to achieve substantial liquidity near NAV if they do not wish to remain in a Trust with a new investment manager and mandate. If a newly reconstituted Board selects Saba as the new investment manager, we intend to deliver attractive terms and greater value to shareholders by shifting the Trusts’ investment mandates to focus on purchasing discounted trusts consistent with our successful strategy at CEFS, as investors have consistently called for.

Vote “FOR” Saba’s Resolutions at the Upcoming General Meetings

As shareholders, you deserve an investment that provides reliable returns, Boards that advocate for your best interests and managers that are focused on delivering enhanced value.

If you are ready for positive change, then we strongly urge you to vote in favour of the Resolutions as we firmly believe they are the only credible, long-term way to earn outsized returns on your investment. Saba believes that passing all the Resolutions is in the best interests of each Trust and its shareholders. Accordingly, Saba will exercise all our voting rights in favour of each Resolution at the Trusts’ General Meetings.

We look forward to continuing this dialogue with you and appreciate your consideration. We are available to discuss our Resolutions and our campaign to #MindTheGap.

Sincerely,

Boaz Weinstein
Founder & Chief Investment Officer, Saba Capital

SABA HOLDINGS IN EACH TRUST

As of 18 December 2024, Saba, directly or indirectly, has the following aggregate interest in each of the Trusts (including at least a 5% holding of shares in each Trust):

Saba’s interest in each Trust is currently less than 30% of the issued share capital of each relevant Trust. Although Saba has no current intention to acquire 30% or more of any Trust, following the potential replacement of applicable investment managers, Saba, as a shareholder, intends to explore possible means by which portfolios of the Trusts may be aggregated, where appropriate, to realise scale benefits and synergies.

¹ The Trusts’ investment managers include Baillie Gifford, Herald Investment Management, Janus Henderson Investors and Manulife | CQS Investment Management.
² The list of benchmark indices includes S&P 500 Index (USA), MSCI ACWI Index (KPC), S&P Global Small Cap Index (EWI), MSCI World Energy Sector Index (CYN), FTSE All-Share Index (HOT), Russell 2000 Tech Index (HRI) and MSCI Europe ex U.K. Small Cap Index (ESCT).
³ Source: Bloomberg. TSR data is inclusive of dividends and as of 13 December 2024.
⁴ Following receipt of the notice in accordance with applicable law and each Trust’s articles of association.
⁵ For USA, there will be a third resolution to reduce the minimum permitted board size from three to two directors.
⁶ Having consulted with the Takeover Panel, Saba is not aware of other interests or holdings in any Trust of persons considered by the Takeover Panel to be acting in concert with it.

[QD comment from senior analyst Matthew Read: We think it is great to finally get some clarity on Saba’s intentions. The activist investor has been stalking parts of the investment companies’ sector for some time but, despite various boards and managers attempting to engage with it, all of those that we have spoken to have said that Saba was not interested in talking to them.

Reading this morning’s statement, we see an obvious flaw in their strategy. Saba wants shareholders to replace the current boards and deliver on its plan to ‘quickly deliver substantial liquidity and long-term returns for all shareholders’. However, those two are often mutually incompatible, particularly for some of the funds it is targeting where the underlying holdings are less liquid – Herald being the obvious example as it is a big fund with a huge tail of small illiquid positions that trade by appointment that could take years to sell off and you would likely move the market against you in many of these, particularly once the market spots you as a forced seller.

The call for substantial liquidity also ignores the unquoted positions held by trusts such as EWI and USA. These are long-term investments and, for some, the pay outs can be big as has recently been illustrated by the spectacular success of SpaceX. Saba also seems to be targeting trusts facing cyclical challenges – such as CQS Natural Resources. History suggests that when Chinese demand for commodities picks up, this fund will perform extremely well and Saba’s plans would mean that ordinary shareholders miss out on that.

We also have to question why Saba would choose to target Keystone Positive Change when that trust is already open-ending? We don’t see how it can really accuse KPC’s board of inaction given the steps that it has taken.

This and the other challenges we highlighted above have long made us feel that Saba doesn’t really understand some of the funds that it is invested in. It is well-documented that Saba has been successful with similar attacks in the US but the UK closed end fund market is fundamentally different. Standards of corporate governance are higher, and returns have generally been better, so this sort of approach makes less sense, particularly now that progress has been made on addressing problems such as the cost-disclosure issues and so discounts are now retrenching.

It seems to us that their approach is very short-term in nature and this highlights a long running issue that, because many retail investors hold their shareholdings through platforms and do not tend to vote, large professional investors get a disproportionate amount of the vote. This can lead to outcomes that are not in the interests of all shareholders and so we think it is all the more important that shareholders in these funds make sure their interests are being protected and get out and vote.]