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In the seven-game series, it’s 1-0 to the UK investment trusts. Saba Capital, the New York hedge fund trying to oust the entire boards of seven trusts, suffered a heavy defeat at Herald, the tech-focused FTSE 250 fund. Saba started with a 29% holding but still got a drubbing; only 0.15% of other votes cast sided with it. On an 80% turnout, the defending board survived with 65% of the votes.
The other six investment trusts (companies that invest in other companies) await their turn, and it’s too soon to assume the UK crew will sweep the board. There were special factors at play at Herald. First, it has a famous fund manager, Katie Potts, who has a loyal following in the UK’s tech scene.
Second, her fame is because her track record is superb: investors in Herald since launch in 1994 have made 28 times their money, which probably made them disinclined to pay much attention to the relative three-year statistics being spouted by Boaz Weinstein, Saba’s excitable founder. Third, Herald, worth £1.2bn, is the biggest of the seven trusts under assault – a status that may have helped the defending chair, Andrew Joy, to get his message across.
But the other six will still be encouraged by the high turnout at Herald. The big unknown was whether retail shareholders, who are often caricatured as dozy creatures who wouldn’t react to a nuclear warning, would get out and vote. Well, they did. There were still a few grumbles about the voting process on investment platforms, but clearly most navigated it.
The biggest problem with Saba’s proposal was the basic lack of information. Weinstein’s idea was to offer investors the choice of exiting at close to net asset value or being part of a “fund of funds” vehicle that would roll up other UK investment trusts. But, by the time the vote arrived, Herald’s investors had already had the chance to sell above the value of the underlying assets. Stake-building by Saba itself had closed the previous discount, which rather neutered its main line of attack.
As for the rollover option, Weinstein was vague about the fees his firm would charge, and didn’t explain which UK trusts – other than any at valuation discounts – would be targeted. It was an invitation to a mystery tour. It should not be surprising that Herald’s investors said no: they will be in the trust because they want specific exposure to the tech sector under Potts’s management and an independent board.
Shareholders’ thinking may be different at other trusts – especially those that have rotten performance records. The next batch of votes fall the week after next. But nor would it be a surprise if the great British investment trust investor – a conservative breed on the whole – declines to be co-opted into a New York hedge fund’s idea of an asset-gathering arbitrage adventure.
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If that’s the outcome, it may seem terribly unfair from Weinstein’s point of view. And it’s true that, by picking these fights and buying big stakes, he has done everybody a favour by closing valuation discounts in the seven trusts. His long-term impact across the sector may also be beneficial if he has put a rocket under boards and obliged them to be more active in closing discounts themselves via share buybacks. But his actual proposal at Herald, as elsewhere, was to seize control from a minority position on the basis of a sketchy plan. That is easy to refuse.
