The past month has seen a number of significant triumphs for Saba Capital’s aggressive brand of activism. Herald Investment Trust (HRI) had to be rescued by Aberdeen, with Saba winning a partial tender offer. The activist investor also won Edinburgh Worldwide (EWI), having ousted the chair and five board members. Impax Environmental Markets (IEM) has been pushed into a tender offer and faces a requisition to replace its board.
There is an uncomfortable argument that in purely financial terms, it has worked for Saba. The discount on Herald has steadily narrowed and now sits at just 7%. Edinburgh Worldwide and Impax shareholders will be able to exit at par. However, it also marks the loss of two unique investment trusts, and leaves other trusts quaking that every short-term period of poor performance could see them forced to wind up. It may even deter people from investing in trusts altogether.
It has also prioritised the interests of the few over the wishes of the majority of shareholders. Jonathan Simpson-Dent, Edinburgh Worldwide Trust’s chair, points out: “Twice in the last year, the majority of non-Saba shareholders have rejected the attempts by Saba to force through its proposals.” Their first attempt was rejected by 64% of shareholders, the second by 53%.
There is another brand of shareholder activism, potentially just as effective and far less disruptive for shareholders. It starts from a similar premise – that wide discounts are bad for shareholders and need to be addressed – but takes a fundamentally different approach to resolving the problem.
Tom Treanor, co-manager of the MIGO Opportunities fund (MIGO), says: “When we look at the investment trust market, discounts are at record wide levels, and have been for a long period of time now as well. Generally speaking, we would hope that something could always be done about a discount to NAV. It will very often come down to capital allocation. At a certain discount level, it makes no sense to make new investments when a trust can buy back its own portfolio at a deep discount. Making new investments means heroic assumptions about the type of returns investors can expect.”
Treanor believes that boards have, in some cases, been caught napping by Saba’s intervention. The average discount for investment companies is currently 11.2%. As recently as 2021, this sat at just 2% . These wide discounts have left trusts vulnerable and required hasty action in the form of buybacks, merger and acquisition activity, or even, in extreme cases, wind-ups. Boards have been slow to find new buyers to replace the wealth manager audience, which has been buying fewer investment trusts as regulation has made it more difficult.
However, that is where the similarities end. Treanor’s approach is largely done behind closed doors, he says. “Our activism starts in private and the majority of it will stay private until the end. It is only on rare occasions that going public has a benefit to it.” This may be because the trust wants to raise shareholder support for a specific issue, or because the board is being intransigent and requires a more aggressive approach.
He has found it valuable to work collaboratively with other shareholders. Historically, he has found that boards can resist change, saying there is a divergence of views. “Knowing the sector very well, knowing the various stakeholders very well is a powerful tool. We can take a unified view to the board of directors, and that then gives them very little room to wriggle out of things if they’re confronted with, for example, a private letter signed by a big chunk of the shareholder register calling for specific actions to be taken.”
It is a similar approach to that taken by the trust’s stablemate AVI Japan Opportunity (AJOT) in its activism with companies. Manager Joe Bauernfreund says: “Boards used to like to tell disgruntled investors: “You’re my only dissatisfied shareholder. Everybody else loves us.” The beauty of having a reputation as an engaged or activist shareholder is that all of a sudden, this comes out in the open. If you make your arguments known and get the support of other shareholders, it means that management can no longer hide.”
Their brand of activism is not about using their position as a large minority shareholder to push for changes they want at – potentially – the expense of other shareholders, but working with other shareholders to improve the outcome. Treanor says it is about the quality of the ideas. He says even with a relatively small stake, putting forward well-constructed and thoughtful ideas about how to improve the company’s prospects is generally taken positively by other shareholders. He expresses real reservations about minority shareholders forcing through changes to the board or pursuing management contracts.
This has been a major bone of contention between the boards of Edinburgh Worldwide and Impax, and the FCA. Simpson-Dent has called on the regulator “to provide clearer definitions and stronger safeguards around board independence, conflicts of interest and related-party transactions to prevent outcomes that undermine the spirit of shareholder democracy”. He has said the FCA needs to guard against minority shareholders pushing their narrow interests at the expense of other shareholders.
For both Treanor and Bauernfreund, the investment is never premised on the success of the activism. Bauernfreund says: “In most cases, the investment has to stand on its own two feet regardless of what happens to the discount. If you have £1 of value that you can buy for 70p but the £1 of value is shrinking, you have a limited window to narrow the gap. If the pound is growing in value, you can make a decent return regardless of what happens to the discount.”
There is no ‘activism playbook’. “Certain themes are universal”, says Treanor, “such as good capital allocation, but the underlying asset class matters.” While an S&P 500-focused fund can be liquidated in an hour or two, the underlying assets in an infrastructure fund may take weeks or months to sell. Each requires a different approach to engagement and execution.
Activism has an important place in the investment trust industry. Pushing boards to narrow the gap between a trust’s share price and net asset value is a vital part of the shareholder democracy. However, a more collaborative and discrete approach to activism can deliver for a broader range of shareholders.
