Saba Capital’s position in Herald investment trust has exceeded 30%, raising the prospect of the activist hedge fund having to make a bid for the £1.2bn global technology fund run by Katie Potts at Herald Investment Management.

The disclosure by Saba Capital yesterday evening that it held just over 30% of voting rights in Herald (HRI) investment trust has come as a surprise as the New York-based hedge fund avoided breaching the key threshold during its unsuccessful campaigns to unseat the trust’s board and those of of six other London-listed investment companies at the start of the year. 

In the stock exchange filing, Saba says the increase in its investment from the previous level of 29.1% is not due to it buying or selling Herald shares but is the result of the trust commencing share buybacks since passing its triennial continuation vote in March.

Saba said in the announcement: “No acquisition or disposal of in-scope securities has been made. Passive notification due to change to total voting rights of the company due to company’s share repurchases.”

The filing issued after markets closed on Tuesday shows that while Saba’s holdings of physical shares in Herald have fallen from 27.8% to 24%, likely as a result of selling them to the trust, the proportion of its indirect holdings via swap derivatives has risen from 1.3% to 5.9% as the number of the trust’s securities and their attached voting rights has shrunk in response to the recent buybacks.

This has been enough to take Saba’s position narrowly over the 30% level over which the Takeover Panel could compel it to make a mandatory bid.

Saba, whose founder Boaz Weinstein played an active role in its “mind the gap” campaign against wide investment company discounts, declined to comment further.

Herald Investment Management has been approached for comment.

James Carthew, head of research at QuotedData, said:

“Our understanding is that Saba would need to increase its shareholding to trigger a bid. Going through the 29.9% figure passively does not require it to take any action.

“However, were it even to buy one share, it would have to bid for the entire company at the price it paid or higher.”

Turbulent year

The general meeting in January saw Saba’s requisition to replace the Herald board and take control of  the company overwhelmingly rejected by shareholders following a high profile media campaign to rouse its investor base. 

Excluding Saba, 99.8% of independent shareholders voted down the motion, with 65% of votes cast including Saba’s against ousting the directors.

Herald won its second victory in March, when again 65% of shareholders on a 69.1% turnout voted in favour of the company’s continuation at its annual general meeting 

After this the market had waited to see how Saba would extricate itself from its large, illiquid position in Herald other than by selling into the trust’s buyback programme. Like other trusts, Herald is limited to purchasing no more than 15% of its shares in a 12-month period, meaning it would take Saba two years to exit its holding this way. 

So far, there has been no sign of a tender offer and accompanying standstill agreement the hedge fund has reached with two of its other targets, European Smaller Companies Trust (ESCT) and CQS Natural Resources Growth and Income (CYN). According to stock exchange filings, it retains significant holdings of over 5% in around 27 investment trusts whose shares have been undervalued for some time.

Herald shares shed their longstanding discount in January when it looked like Saba could succeed in winding down a fund that has done much to support British tech companies. They have reverted to a 10% discount since Saba’s defeat at the general meeting. 

It’s been a turbulent year for the trust. Aside from the battle with Saba, like many investment funds, Herald was hit hard in the market turmoil provoked by US president Trump’s launch of swingeing tariffs against its trading partners in April. 

However, the shares bounced back after Trump announced a 90-day reprieve, this week extended by another month to August. That has left the shares down 5% this year. Longer-term performance under Potts, who has run the portfolio since launch in 1994, making her one of the longest-serving fund managers in the UK, is strong. Up to the end of last year, Herald’s investment return had grown its assets by 27 times since flotation. Over the 15 years since the end of the global financial crisis in 2009, the company said shareholders had enjoyed a six-fold increase in their stakes.

The latest figures to the start of this week show a 10-year total return of 216.8% compared to the 125% average of trusts in the Global Smaller Companies sector, according to the Association of Investment Companies.