Monday Club – 03/03/25: Your weekly Wealthwise digest

Investment round-up

* Saba Capital’s requisition notice of the Schroder UK Mid Cap board has been deemed invalid. The group did not hold sufficient shares on the date of the notice to force a general meeting, according to the London Stock Exchange. Read more in ‘In focus’ below

* Brickwood has launched its first fund for investors. The value boutique, which brought together former Jupiter managers Ben Whitmore and Dermot Murphy and ex-Schroders manager Kevin Murphy, will launch a new fund focused on buying shares in undervalued UK companies. Read more from the FT here

* Janus Henderson has launched a Global Smaller Companies Oeic for UK investors. It will be a UK version of the Luxembourg-domiciled SICAV launched in 2019 and will be managed by Nick Sheridan using the same strategy.

* Schroders Greencoat has received regulatory approval in the UK to launch the Global Energy Infrastructure Long-Term Asset Fund. The fund, which will provide exposure to energy transition infrastructure, will be a feeder fund into the Schroders Capital Semi-Liquid Energy Transition fund.

* Goldman Sachs Asset Management is launching its first biodiversity-focused bond fund. The fund aims to raise $300m to $500m to invest in corporate bonds linked to biodiversity impact.

In focus: Was the trust sector caught napping?

Swelling amid the general exasperation with the strategy and tactics of Boaz Weinstein’s Saba Capital, there is a second undercurrent – that the saga has given the investment trust sector a welcome jolt. This theory suggests the industry has become sleepy and complacent and the activist investor is galvanising stronger governance and more active discount management. Is this true? And even if it is true, is it necessary?

It is clear that trust shareholders had no desire to be rolled-over into a Weinstein-managed vehicle. Saba suffered comprehensive defeats in the requisitioned meetings for all seven of the trusts it targeted. Nevertheless, it has come back for more and is now proposing to roll over four trusts – CQS City Natural Resources Growth & Income (CYN), Middlefield Canadian Income (MCT), Schroder UK Mid Cap (SCP) and The European Smaller Companies Trust (ESCT) – into open-ended vehicles, with the aim of getting rid of their discounts.

This new tactic will be tougher to defend against, warns Ewan Lovett-Turner, head of the Investment Companies Research team at Deutsche Numis. “It removes a large part of the conflicts inherent in Saba’s previous approach and also puts Saba less in conflict with management groups,” he explains.

“As a result, if the boards want the investment company to continue they need to outline the case to shareholders for why the assets are best managed in the investment company structure and put forward credible plans that will see the discount narrow.” Investment companies need to have differentiated offerings and be more aggressive with discount control mechanisms, Lovett-Turner adds.

This may prompt some existential angst on the part of investment trust managers. The team at Square Mile Research and Consulting says “some level of introspection” is appropriate for the sector, adding: “The longer-term impact of Saba’s intervention will hopefully be a greater focus by investment trust boards on maximising investor share-price total returns through better capital allocation decisions, more aggressive discount-control mechanisms and a greater emphasis on returning capital to investors where it is in their best interests.”

They continue: “Boards must therefore be much more proactive to utilise all available options to create differentiated, alpha-rich, bigger, more liquid and cheaper investment vehicles that trade closer to NAV and that are ultimately a far more attractive option for investor capital. If this is Saba’s legacy, then the future may be brighter for this storied, highly adaptable, resilient and successful British institution.”

Read more from Wealthwise: Saba saga

There are some signs that changes are happening already – for example, Henderson Opportunities rejected Saba Capital’s bid to take control of the board, but 99.6% of votes were cast in favour of a ‘scheme of reconstruction’ that will see the £90m trust closed. Around 57% opted for a cash exit and 43% to roll-over over into the Janus Henderson UK Equity Income & Growth fund.

Other investment companies are watching their backs. BlackRock American Income has proposed a tender offer and investment policy change, for example, while Montanaro UK Smaller Companies – where Saba has a stake of 12% – has introduced a single-digit discount policy.

“We expect more investment trusts may introduce single-digit discount policies, although these are likely to be more effective if implemented before activists have taken a stake,” says Lovett-Turner. All this is on top of a busy period for M&A activity in the sector – Abrdn has almost halved the number of investment trusts in its range, while a number of other trusts have merged or closed.

It is clear that Saba has galvanised activity but will it lead to lasting changes? Bill Ackman, manager of the Pershing Square investment trust, set the cat among the pigeons, when he questioned the efficacy of buybacks for closing discounts. “It is proven buybacks are not a discount-closing mechanism,” he told Citywire in an interview.

“I think of share repurchases as a capital allocation decision. It is the chief executive’s job to allocate capital to the next Uber. I will make more money for people finding the next Uber rather than buying back our shares.’ Perhaps proving his point, Pershing Square Holdings continues to buy back its own shares but remains on a stubbornly wide discount.

There has been debate in the industry before about whether buybacks really work to narrow discounts sustainably – and indeed on whether discounts really matter, in many cases. Investors buy at a discount and sell at a discount, the argument runs, so it is only discount volatility that really has an impact.

There is also a question over whether a conversion to open-ended funds is in the long-term interest of shareholders. Quoted Data points out that, over the long-term, closed-ended funds beat open-ended funds, noting: “Over 10 years, in 15 of 21 sectors, closed-ends have outperformed open-ends on average.”

Just in case investors needed reminding, the investment trust structure has inherent merit. It is, for example, a far better option to manage illiquid assets. It allows managers to take a long-term view. Plenty of investment companies outperform their open-ended equivalents and, while gearing certainly plays a part, the flexibility afforded by the closed-ended structure is also important.

Read more from Wealthwise: Wind-up merchant

An alternative option for realising value in investment trusts has emerged over the last week. New activist investment company Achilles has raised £54m with the aim of targeting poorly-performing and sub-scale alternative investment companies. It will be managed by Harwood Capital Management and is led by its chief executive Chris Mills, with Robert Naylor on the board of directors.

The pair has a pedigree at realising value for shareholders. James Carthew, head of investment company research at Quoted Data, points out: “The team argue it has unlocked around $950m of shareholder value through activism in the last 18 months – with Round Hill Music sold at a 51% premium to when they were appointed to the board, Hipgnosis Song sold at a 44% premium and PRS REIT currently trading at a 46% premium to when it opened discussions with the board last summer.”

The new player’s focus will be on companies in the property, infrastructure and renewables sectors – and it has point out that there is currently a £39bn valuation gap between market caps and asset values in these groupings. It will work with one or two trusts at a time, and – in stark contrast to the Saba approach – will work with boards rather than against them.

“This may be achieved through taking control of companies and subsequent portfolio sales,” says Lovett-Turner. “Mergers, fee reductions, manager changes and other measures may also be pursued to encourage a re-rating. The fund will take an active role in engaging with board and managers of investment companies in its portfolio.”

This would seem a more pragmatic approach. “Achilles seems likely to go about its job the right way – by building consensus among investors and having sensible and open-minded discussions on the way forward,” says Carthew. “I think Achilles may be a force for good – although that does not mean I will always agree with its choice of targets. By contrast, Saba’s scattergun, bullying and, ultimately, inept attacks deserve to be fought off.”

The idea that Saba’s influence creates disruption and is therefore useful needs to be interrogated. Saba’s approach has galvanised activity but it is not necessarily productive activity nor necessarily in the long-term interests of shareholders – not least, if it ultimately decides to exits the market and places huge selling pressure on the shares. Short-sellers have already begun queuing up. The emergence of Achilles may be a more encouraging development in the longer-term.

Read more on this from the FT here and from Morningstar here