The Association of Investment Companies (AIC) has urged shareholders in Edinburgh Worldwide (EWI) to vote in the forthcoming general meeting called by Saba Capital yesterday as its board rejected the activist hedge fund’s renewed attempt to replace its board.

Jonathan Simpson-Dent, chair of the £700m global smaller companies investment trust, said the board was “disappointed” by Saba’s second effort to oust all its directors nine months after its first attempt was soundly rejected by shareholders.

He said the open letter from Saba founder Boaz Weinstein did not “represent the significant progress” EWI had made since the board “reset the company on a path for growth” a year ago.

Since then, the portfolio managed by Baillie Gifford’s Douglas Brodie, Svetlana Viteva and Luke Ward had made a total investment return of 17.5%, well ahead of the 4.8% return from the S&P Global Small Cap index, which he said was the right benchmark index, not the FTSE All-Share cited by Weinstein.

Share buybacks and marketing by the board had narrowed the share price discount to 5.6%, which he said was significantly lower than the Global Smaller Companies sector average of 10.9%.

The chair indicated willingness for Saba, a 30% stake holder, to have a representative on the board, but dismissed the idea of a removing all six directors.

“While we are open to discuss board composition with Saba, we would strongly reject any proposal to replace the entire board and the ambiguity that would follow,” said Simpson-Dent.

The trust’s financial adviser had arranged to meet Saba next week before its letter was published, he said. “We will update shareholders on further developments in due course,” he added.

Winterflood analyst Emma Bird said: “We agree with the EWI board that the replacement of all directors is highly unlikely to deliver the best outcome for all shareholders, with a superior solution, in our view, being some form of liquidity event” to let Saba and other shareholders to sell their shares at NAV minus costs.

“Vital” to vote

While not taking sides in the battle between the Baillie Gifford managed investment trust and the activist hedge fund, the Association of Investment Companies said it was “vital” that shareholders vote on Saba’s proposal and that investment platforms enabled them to do so.

AIC chief executive Richard Stone said: “Retail investors are significant holders of this investment trust so, once confirmed, it’s essential platforms notify their customers about this meeting and encourage them to vote. To enable all shareholders to express their views, information must be made available and the voting process must be as simple as possible.”

The AIC, which represents 286 investment companies with assets of around £272bn, details the voting arrangements of all major UK share-dealing platforms on its website.

In February Edinburgh Worldwide survived Saba’s first bid to oust its board, securing a big majority of independent votes in a 63.8% to 36.2% result on an unusually high turnout of nearly 65% of shareholders.

It will need a similarly high turnout to overcome Saba this time.

In February, EWI was the seventh and last investment company targeted by the US firm to win a comfortable majority in favour of its board. The comprehensive defeat of Saba was made possible by an orchestrated PR campaign that succeeded in galvanising retail shareholders.

Our view

Matthew Read, senior analyst at QuotedData, said: “We entirely agree with EWI’s board’s response to Saba’s open letter. In our view, Saba’s arguments are fundamentally flawed and, given that Saba was resoundingly rejected when in it last attempted to seize control of EWI’s board in February, we would have sincerely hoped that it had learned some lessons from that experience and revised its approach. Clearly this is not the case and I imagine that the overwhelming majority of its fellow EWI shareholders will not be impressed by Saba’s latest requisition request; EWI will once again have to incur costs to defend against Saba’s proposals which we do not believe are in other shareholders interests.

“Our primary concerns begin with Saba’s use of the FTSE All-Share as its main comparator. EWI is a global small cap trust and its performance should primarily be assessed against a global small cap index. There is absolutely nothing wrong with the benchmark EWI has chosen – its reference index is the S&P Global Small Cap index – and, if you look at its performance over the year to the end of October, EWI has provided NAV and share price total returns of 29.7% and 30.2% respectively, versus 12.8% for its benchmark. Quite frankly, Saba has nothing to complain about here.

“Similarly, we don’t think there’s anything for Saba to moan about with EWI’s buyback activity. The discount was already low – 7.6% prior to the publication of Saba’ letter, but it has been in mid-single digits continually for at least the last six months – and when set against the performance it has achieved during the last year, allocating more capital to repurchases would not have made sense in our view.

“To be clear, I would not want to be invested in any trust that had a board solely appointed by one majority shareholder, particularly if it was Saba, as it seems to repeatedly act in its own interests, to the detriment of other shareholders. We are also not surprised to hear that Saba has failed to engage with EWI’s board, despite its best efforts to open a dialogue with the New York hedge fund, as this is a pattern we have seen with all of its other targets. Our overriding message to EWI shareholders is once again, get out and vote to protect your investment.”