A more conventional “behind the scenes” engagement with investment company boards is reaping results for the activist hedge fund after its high-profile defeats in January, says Deutsche Numis.

Analysis by Deutsche Numis shows Saba Capital is having more success in extricating itself from investment trust targets than last week’s disclosure of a position just over 30% in Herald (HRI) might have suggested.

Since Saba’s spectacular failure to seize control at seven investment companies in January, when shareholders voted overwhelmingly in favour of their boards, the US firm has taken a less “brash” and more conventional “behind the scenes” approach to its engagement.

Ewan Lovett-Turner, head of investment companies research at Deutsche Numis, said far from going away after its high-profile defeats, Saba now held over £1.3bn in disclosed holdings in around 30 investment companies.

Lovett-Turner said the New York firm founded by chief executive Boaz Weinstein was yielding some successes. Having bought its stakes on wide discounts, it had achieved several large exits at net asset value (NAV), for example in the conversion or mergers of Middlefield Canadian Income (MCT), Keystone Positive Change (KPC) and Henderson Opportunities (HOT) into open-ended funds.

Big tender offers at CQS Natural Resources (CYN), and European Smaller Companies (ESCT) as well as the previously scheduled five-year tender at Polar Capital Global Financials (PCFT) also enabled Saba to sell out at NAV and pocket gains on re-rated shares.

The more pragmatic approach meant Saba was willing to accept selling below NAV if it achieved a mark-up. Deutsche Numis analysts highlighted Saba’s disposal of a 12% stake in Montanaro UK Smaller Companies (MTU) when the company bought its 19.9m shares in one day in early March at 8.5% below asset value compared to the current one-year average discount of 11%.

Boards respond to pressure

Pressure from Saba spurred more active buybacks, which is allowing the activist to move towards the exit on narrower 6%-7.5% discounts at Montanaro European Smaller Companies (MTE); Geiger Counter (GCL), the uranium fund run by Manulife owned CQS; Lowland (LWI), a Janus Henderson UK equity income trust; Edinburgh Worldwide (EWI) at Baillie Gifford; and Worldwide Healthcare (WWH) run by Orbimed in New York.

Boards seeking to “keep the wolf from the door” and discourage Saba from taking bigger stakes, had seen many more focus on managing discounts to keep share prices within 10% of asset value.

Schroder UK Mid Cap (SCP), where Saba has 12%, in March promised to buy back shares more actively as part of a package of measures to improve shareholder returns, that include a three-yearly continuation vote starting in 2028.

The activist has been busy trading Bellevue Healthcare (BBH), rebuilding its stake to 16% after selling down in a tender offer at the end of last year, before reducing it again at a tight discount into the board’s buybacks, following the launch of a zero discount policy in April. Deutsche Numis says the stake is now 10.8%.

Buying BASC

Brown Advisory US Smaller Companies (BASC) is an example of a trust where Saba built a new stake this year, recently lifting it to 10%. In February the company pledged to hold a 100% tender offer that could see it wind up if performance does not beat the benchmark in the five years to June 2028. The shares stand on a 10% discount.

In the past year Saba has also appeared above 5% on the registers of Fidelity Emerging (FEML), Ecofin Global Utilities (EGL), Impax Environmental Markets (IEM) and more recently Utilico Emerging Markets (UEM) and VPC Speciality Lending (VSL), which is in wind-up.

It has also struck “standstill” agreements with BlackRock and CQS/Manulife not to seek to remove the boards of their investment companies or requisition votes at AGMs for two-to-three years. It holds 10% in BlackRock UK Smaller Companies (BRSC).

All of this comes amid what is set to be a record year for corporate activity in 2025 with lots of bids for real estate funds such as Warehouse (WHR), currently subject of a battle between Blackstone and Tritax Big Box (BBOX), and the acquisitions by private buyers of BBGI Global Infrastructure and Harmony Energy Income.

Share buybacks in the first half leaped 25% to £4.6bn from £3.7bn a year ago, ahead of all other previous years, as fear of activism focused boards on shareholder returns. This contraction in the sector has improved the market’s supply-demand imbalance with the average investment company discount narrowing to 13.5% at 30 June compared to 16% six months earlier.

Saba is not the only activist in town either with Achilles (AIC) raising £54m at its flotation in February to target ‘alt-asset’ funds on wide discounts, and MIGO Opportunity (MIGO) embracing a more activist strategy after the retirement of fund manager Nick Greenwood.

QD analyst comment from James Carthew: Saba may now be realising that the failure of the brazen attempt at asset gathering earlier this year may now make it much harder to win a full frontal assault. However, of the 30 trusts that Deutsche Numis has identified as being Saba holdings currently, most are already taking action. I think the message here is be proactive and do not let the activists get their foot in the door. As discounts come down, they will eventually run out of viable targets.