After Saba Capital waged a high-profile campaign against UK investment trusts over the past year and a half, targeting discounts, governance and performance, analysts at Investec have turned their sights on the US firm's own management.
The analysts acknowledged that some of the many closed-ended investment companies Saba has targeted in London have seen its activism help secure cash exits close to net asset value.
However, Investec argued that sometimes Saba has declined such exits, with its intentions in these cases “notably opaque”, raising questions over whether the real objective is “control rather than liquidity”.
This led the bank's analysts to swing their aim onto Saba’s own US-listed vehicle, Saba Capital Income & Opportunities Fund I, where Saba was appointed adviser in 2021 as serving as "a cautionary tale".
Since then, the fund has traded on a persistent discount, and has recently de-rated sharply, with the discount widening from 2.3% to 14.6%.
Notably, it has not repurchased a single share since a 2021 tender offer, despite buybacks being permitted.
Instead, last year the fund launched a discounted rights issue.
In Investec’s words, “issuing new shares at a material discount when the fund is already trading on a persistent discount raises fundamental questions about capital discipline and alignment”.
The broker also highlights governance optics, with the fund’s chairman a senior Saba executive and the board’s aggregate shareholding is zero. The “alignment question appears unavoidable”, Investec says.
Saba’s activism may have delivered a “much-needed wake-up call” to the sector. But its apparent pursuit of control risks, in Investec’s view, overshadowing that more constructive impact.
"In our view, the implications for investors of this strategy are clear and unmistakable. Investors cannot say that they have not been warned.
"We believe this control strategy is fundamentally flawed."
The analysts said it risks "alienating the UK market" at a time when Saba is seeking to launch a UCITS ETF, and threatens to overshadow its constructive impact in the UK.
"However uncomfortable it may be to concede, Saba’s actions provided a much-needed wake-up call to an industry where an extended bull market had bred pockets of complacency, and which found itself flat-footed when tailwinds brutally and abruptly reversed.
"This has resulted in a much greater focus on discount management, moving the debate along from the stale “buybacks don’t work” narrative, and accelerated corporate actions, and in our view, this has strengthened the investment proposition."