UK watchdog scrutinises investment trusts’ battle with US hedge fund

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The UK’s Financial Conduct Authority has been involved in a an increasingly groundbreaking activist campaign targeting seven investment trusts as concerns grow over the interests of retail investors.

The FCA has contacted major retail investment websites for customer communications at seven investment trusts targeted by US hedge fund Saba Capital, the regulator said, to ensure shareholders are aware of board memberships at the trusts about upcoming votes.

FCA officials have asked Hargreaves Lansdown, Interactive Investor and AJ Bell how they alert clients who hold shares in investment trusts on their platforms, according to people with knowledge of the communications.

Saba, which is in charge activist investor Boaz Weinsteincalled on shareholders to vote to oust the trusts’ boards, arguing that the boards had failed to hold their investment managers accountable for poor performance.

The campaign could lead to one of the biggest shakeups in the 150-year-old British investment trust industry, which manages £266bn of assets.

Saba has proposed its own candidates for the board and ultimately aims to take over the investment management of trusts currently run by Baillie Gifford, Janus Henderson, Herald Investment Management and Manulife.

However, the investment trust sector has raised concerns that retail investors may not participate in the vote, paving the way for Saba, which holds between 19 per cent and 29 per cent stake in each trust, worth a total of £1.5 billion. Saba needs more than 50 percent of the vote for each trust to win.

The FCA is monitoring the situation closely and is in close contact with investment platforms that handle communications with investors in investment trusts, according to a person briefed on the matter.

However, voting rules for the removal and appointment of investment trust directors are set out in the Companies Act, not FCA regulations, so the watchdog ruled that for now these are internal matters for the trusts, their boards and investors, he added.

The Association of Investment Firms, the industry’s trade body, has written to the FCA raising concerns about shareholder protection.

“At risk, the regulator cannot simply rely on people doing the right thing,” said Richard Stone, chief executive of the AIC. to encourage voting.”

Stone has called on the FCA to review how board independence is determined under listing rules, saying Saba’s bid to control the boards of two investment trusts and also become their asset manager has raised potential conflicts of interest.

The seven trusts Saba is targeting are Baillie Gifford US Growth; Edinburgh Worldwide Investment; Keystone positive change; European small companies; Henderson Opportunities; Herald Investment; and CQS natural resource growth and income.

Hargreaves Lansdowne and AJ Bell said they had written to shareholders of the trusts to encourage them to vote.Interactive Investor said it had also taken steps to enable clients to vote.