Activist hedge fund Saba Capital plans to launch an exchange-traded fund (ETF) to achieve its goal of having a vehicle targeting investment companies and trusts on wide share price discounts.
The Saba Capital Investment Trusts Ucits ETF is awaiting approval by regulators in Ireland, where it would be domiciled, the Financial Times reported.
It will sit alongside the New York firm’s stable of 11 funds in the US and Cayman Islands that included undervalued closed-end funds in their portfolios.
These include the US-listed $432m Saba Capital Income and Opportunities (BRW) and $282m Saba Capital Income and Opportunities II (SABA) funds run by Saba founder Boaz Weinstein and portfolio manager Paul Kazarian which held 24 UK investment companies at the end of August.
The actively managed ETF would be Saba’s first to focus exclusively on the £267bn UK listed closed-end funds sector. This is enduring a lengthy downturn caused by challenging markets, an exodus from the UK by domestic markets and obstructive regulations.
Excluding 3i Group (III), the highly-rated FTSE 100-listed private equity giant, shares in investment companies trade around 14% below the value of their assets. This provides activists like Saba the opportunity to build up stakes and pressure boards to take steps to narrow the share price discounts before selling at a profit.
In January, Saba provoked a wave of opposition from investors and investment company professionals when it unsuccessfully tried to take control of seven listed fund boards. Its aim was to convert at least one of these into a fund that could become the focal point of its campaign to extract value from the undervalued sector.
The new ETF offers a simpler solution even if it requires Saba to raise money from investors. Its launch comes as Saba’s activities are attracting more attention after its defeats at the shareholder meetings in January. As we revealed this month, Saba has raised its stake in Terry Smith’s Smithson (SSON) investment trust, raising the prospect of another battle should the company have to hold a continuation vote next year on account of its share price discount.
When launched the Saba ETF could be expected to hold some of the following investment companies in the BRW and SABA income funds. These are:
- Schroder UK Mid Cap
- Schroder British Opportunities
- BlackRock Smaller Companies
- Baillie Gifford UK Growth
- Herald
- Mercantile
- SDCL Energy Efficiency Income
- AVI Global
- Worldwide Healthcare Fund
- Bankers
- Symphony International
- Aberdeen Diversified Income and Growth
- Schiehallion
- Molten Ventures
- Syncona
- Middlefield Canadian Income
- RIT Capital Partners
- Lowland
- BlackRock Throgmorton
- Monks
- Templeton Emerging Markets
- Scottish American
- Sirius Real Estate
- Baillie Gifford European Growth
Our view
Matthew Read, senior analyst at QuotedData said: “It is clear from Saba’s ETF proposal that it recognises the latent value hidden in many UK-listed investment companies and is keen to find a way to realise this. In many respects, the question for us remains: why are so many other investors happy to pass on this opportunity? Nonetheless, if Saba can amass a decent sum of money and deploy this into the sector then this in itself could help narrow discounts and benefit all shareholders.
“However, for ETFs to function well, they ideally need large liquid underlying holdings with tight bid-ask spreads, and so, in our view, not all investment companies will be suitable for the proposed Saba ETF and, as its previous campaigns have shown, Saba has not been judicious in its choice of targets. There are already good funds with an activist slant targeting investment company discounts such as AVI Global Trust (AGT) and MIGO Opportunities (MIGO). These two funds also have the additional benefit of having their own boards to hold the managers to account and both are available on tight discounts too.
“History shows us other instances where funds have been set up to crystalise value hidden in discounts. While some have been effective, investors would have made more money by holding the underlying fund. We think any existing shareholders should think very carefully about dumping their holdings and piling into Saba’s ETF as they could easily find that they’re better off where they are already.”
