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When the Foreign & Colonial Government Trust was launched in London in 1868 to give individual British investors access to sovereign bonds from countries including Chile, Egypt, Turkey and the US, The Economist described it as “very peculiar; it is not a company, and yet it is to do things like a company . . . [but] the idea is very good”.
So it has proved. The great British invention of the closed-end investment company, which raises permanent capital from shareholders to invest in equities and other financial assets, has thrived. There are now some 300 UK investment trusts, holding about £266bn in assets, including five constituents of the FTSE 100 index.
But nothing is sacred in capital markets, and there is a barbarian at the gate: Boaz Weinstein, founder of the US hedge fund Saba Capital. Weinstein has latched on to the depressed state of investment trusts, many of which trade at discounts to the value of their net assets. He is pressing for seven trusts to fire their board directors and let Saba manage their money.
This financial barbarian has a point. The UK investment trust sector enjoyed a decade of rapid growth after the 2008-09 financial crisis, as interest rates fell and investors sought out higher returns in riskier places. But three years of higher rates have reversed the trend: many trusts have performed poorly, with their discounts rising as investors sold shares.
Weinstein styles himself a “white knight” who has invested £1.5bn in the sector at a time when others were wary. His foray has already had an effect: discounts have been narrowed as trusts have bought back their shares to escape his wrath, and there has been a flurry of mergers and cuts in their management fees. His rude attack on the “miserable seven” has encouraged the others.
The question is whether we are merely watching a Wall Street arbitrageur pounce on a temporary valuation gap or whether investment trusts have intrinsic problems. “I keep on telling people this is an incredible buying opportunity. It is Black Friday every day,” says one trust director. Weinstein has listened, but it is hard to get the attention of UK investors.
They now have more alternatives than when F&C offered its Victorian portfolio of foreign government bonds. Amazon, Nvidia and Netflix are, for example, among the top 10 holdings in the Baillie Gifford US Growth Trust, which is one of Weinstein’s targets. Any investor in a low-cost S&P 500 index tracker fund gains exposure to those.
But investment trusts retain one historic advantage over other forms of investment fund. They hold permanent pools of capital and are not at risk of being forced to sell assets rapidly under pressure from their investors. This enables them to make long-term investments in illiquid securities such as private company shares, venture capital and infrastructure.
This is of growing importance as more companies stay private and global stock markets shrink. UK investment trusts used to be largely focused on public companies but they have diversified in recent decades into private and alternative investments. That honours their original purpose of giving retail investors access to emerging markets.
Weinstein is offering a faster solution than waiting for the sector to come good. He wants to merge the trusts he has targeted into an investment vehicle that would push others to squeeze their discounts by measures such as buybacks. He also claims that Saba would focus its enlarged investment trust on long-term UK investments, rather than trillion-dollar US companies.
We can be sure that he would do the first, since those are the tactics of a hedge fund activist. As for the second, shareholders would have to take a great deal on faith, especially the future attitude of the directors (including Weinstein) that Saba nominates to the boards. It has already said it will propose itself as the funds’ manager.
It would be a mistake to dismiss Weinstein solely as an opportunist. He has already shown more insight into investment trusts than other investors who have stayed away. Saba has also provoked boards that were satisfied just to complain at their plight into taking action. If money is now flowing out through buybacks, maybe some got bloated in the good years.
Investment trusts have both a long history and distinct potential for the future, given the need for greater investment in growing the economy, instead of savings sitting in cash. But UK investors have to seize that chance themselves, not leave it to a US hedge fund with an idea.
