If shareholders in Herald (HRI), Impax Environmental Markets (IEM) and Edinburgh Worldwide (EWI) investment trusts require any reminding of the peril they could face under Saba Capital, they only need look at the “cautionary tale” of the US activist’s record on one of its own funds, says broker Investec.

Alan Brierley, head of investment company research at Investec, has examined events at Saba Capital Income & Opportunities (BRW) since Saba was appointed investment adviser to the closed-end fund, formerly known as Voya Prime Rate Trust, in 2021.

Despite criticising the floating-rate bank loan fund for its excessive share price discount, poor performance and governance issues when it campaigned to take over the portfolio from Voya Management, under Saba, shares in the now broader $416m multi-asset fund have continued to trade below net asset value (NAV). After a sharp de-rating in recent months the fund stood at a 14.6% discount, while there had been no share buybacks since the heavily oversubscribed tender offer after its appointment, Brierley said.

Last September, with performance weighed down by a top three holding in Grayscale Ethereum, a crypto currency fund, BRW launched a heavily discounted 1-for-3 rights issue priced at 12.5% below NAV to raise more money for its income and growth mandate. This, the analyst said, raised “fundamental questions” about capital discipline and the lack of alignment between the fund manager and investors.

“Shareholders were presented with a stark choice – either make an additional investment or accept dilution,” said Brierley.

Why would the BRW board choose to prioritise asset growth and increased management fees for Saba over more shareholder friendly measures to control the discount?

Brierley suggested that was because the board was too close to the fund manager founded by Boaz Weinstein. BRW’s chair Andrew Kellerman is head of business development and investor relations at Saba Capital and also chairs its sister fund Saba Capital Income & Opportunities II, while three of its directors also sit on the other fund’s board.

The analyst notes that US corporate governance standards differ from the UK and that while 40% of boards are required to be independent of the fund manager there was no requirement for the chair to be independent, although Brierley thought it was increasingly seen as best practice. It was also common practice for trustees to sit on the boards of several funds run by the same adviser.

Nevertheless, in his opinion, “the governance optics are difficult to ignore – when the chairman of a fund is also a senior executive of the investment adviser, and three other trustees sit on other boards of funds managed by the same adviser, the distinction between oversight and management becomes increasingly blurred.”

Ironically, the activist received its own activist approach this month when Gabelli challenged BRW over its performance and proposed one of its directors be appointed to the board. Within 24 hours, the boards of the two Saba funds responded with a proposed merger.

Brierley acknowledged that Saba had provided a “much-needed wake-up call” for the UK investment company sector looking complacent after an extended bull market crashed to a halt in 2022. Saba’s pressure on boards to step up moves to narrow their discounts had been positive in several cases.

However, that was overshadowed by Saba’s refusal to sell its stakes in HRI and IEM at close to NAV in tender offers provided by their boards. That showed that its intention was to win control and grow its assets under management “regardless of the highly destabilising impact” on the investment trusts and their long-standing shareholders. 

Echoing IEM chair Glen Suarez’s call today for Saba to be “reasonable”, Brierley said Saba’s control strategy was fundamentally flawed. “It risks alienating the UK market at a time when Saba is seeking to launch a UCITS ETF, and generating unwelcome noise at home, where its funds have struggled recently. In addition, it threatens to overshadow the more constructive impact that Saba has had on the UK closed-end industry.”

Saba has been approached for comment.

Stay a step ahead. Our daily newsletter brings you the latest on investment trusts and active ETFs. Subscribe here.