The AIC recently reported that investment trust discounts are at their widest since the global financial crisis in December 2008. It is a trend that really started in early 2022, when inflation and interest rates began to climb and war broke out in Ukraine.
At the end of October the average discount was 16.9%, which could represent a long-term buying opportunity. There are certainly lots of activist investors who seem to think so, judging by their growing presence on investment company share registers.
One that is worth watching is Saba Capital that is run by the American hedge fund manager Boaz Weinstein. It has been particularly active in the last few weeks and has been buying sizeable positions in an attempt to pressure the Boards to take more effective action to narrow the discounts.
Unlike some of its peers, Saba is more interested in making a quick buck and is not that concerned about maintaining an ongoing exposure. This could enable fleet-footed private investors to make a fast profit or to open a long-term position at an attractive entry point.
In The Cross Hairs
One fund that has already felt the impact is the European Opportunities Trust (LON: EOT), where Saba has a five percent holding. It was an obvious target as the recent performance has been poor, although the manager has a strong record over longer periods.
Another feature that will have attracted them is the share register, which is dominated by value-oriented investors. According to Bloomberg these include: 1607 Capital, 13% stake; Allspring, 12.1%; and City of London (LON: CTY), 6.1%; as well as the five percent held by Saba.
EOT is currently trading on a 10% discount and has a continuation vote scheduled for November 15. Saba has called for a 50% tender offer, although the Board is only offering a 25% tender that it says would accommodate the desired exits close to NAV while maintaining a viable size of assets.
The broker Numis believes that the outcome of the vote is evenly balanced and the result will hinge on the activist investors noted above. They say that with net assets of £845m, European Opportunities could return a significant amount of capital, but a smaller ongoing vehicle might find it hard to attract new buyers.
On The Radar
In October, Saba doubled its stakes in Edinburgh Worldwide (LON: EWI), the smaller companies fund run by Baillie Gifford and BlackRock Smaller Companies (LON: BRSC), which invests in UK small cap stocks. The enlarged positions now stand at 10% and 10.2% respectively.
Each of these exposures were achieved by the use of total return swaps that include the relevant voting rights. Both trusts have been struggling and are currently available on discounts of around 13%, which is marginally tighter than when the stakes were acquired last month.
In late September, Saba opened a five percent position in CQS Natural Resources Growth & Income (LON: CYN) through another total return swap. The shares in this small mining trust are currently available at a 16% discount to NAV.
There are also several other notable exposures including a 7.1% stake in Henderson Opportunities (LON: HOT) via a direct shareholding. This UK fund has a lacklustre performance record and is trading at a 16% discount.
Saba’s largest holding is its 11.1% ownership of JPMorgan European Discovery (LON: JEDT) that has underperformed its peer group over one, three and five years. It is available at a discount of 13%.
The firm has positions of just over five percent in: Baillie Gifford US Growth (LON: USA), Herald (LON: HRI), Keystone Positive Change (LON: KPC) and Schroder UK Mid Cap (LON: SCP). These are available on discounts of 19%, 15%, 17% and 12% respectively.