Three investment trusts face takeover by US ‘activist’

Investors in three investment trusts will be wondering how to act as their boards respond to attempts by the American ‘activist’ investor Saba to force changes that could see the trusts run by new managers to radically different mandates.

Two of the trusts, Edinburgh Worldwide and Impax Environmental Markets, have already asked shareholders to vote on proposals to allow them to sell their shares at a small discount to the trusts’ net asset value while a third, Herald, is likely to follow suit if negotiations with Saba fail.

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What is happening at the three trusts?

In all cases, the trusts have faced attempts by Saba to change the board by appointing its own nominees, who, the boards fear, could then appoint Saba as manager and bring about a profound change in the strategy of the trusts. In effect, the funds that investors had chosen could cease to exist in their current form and could become very different vehicles.

After repeated attempts by Saba to change the boards of the trusts, the current directors, at least in the case of Edinburgh Worldwide and Impax Environmental Markets, are effectively saying that the game is up – they are acknowledging that Saba is likely to succeed sooner or later. Herald is still negotiating with Saba but has said it may end up in the same position as the other two trusts.

To prevent shareholders becoming ‘trapped’ in Saba-controlled funds, the boards want to offer them the chance to sell their shares back to the trusts at or close to net asset value (NAV), as opposed to selling them in the market, where there would be the risk of having to accept a substantial discount to the NAV.

Edinburgh Worldwide and Impax Environmental Markets have already arranged votes on whether such an opportunity to sell the shares (via a ‘tender’ offer) should go ahead while Herald is keeping the option of such a vote up its sleeve in case negotiations with Saba fail.

Although shareholders in investment trusts, which are listed companies, always have the opportunity to sell their shares on the open market, the danger is that if all of them tried to sell all their shares at the same time to avoid control by Saba, there would be far too few buyers and consequently the price offered would be very low – in other words, there would be a very large discount and shareholders would end up getting far less than NAV. The tender offers get round that problem.

When are the votes and what do I have to do?

Shareholders will vote at general meetings of Edinburgh Worldwide on 10 April and Impax Environmental Markets on 16 April. As we said, Herald has not yet arranged a vote and may yet avoid one. Any further announcements from Herald will be made on the appropriate page of the London Stock Exchange website.

The vast majority of private investors in the trusts will hold their shares via platforms such as Fidelity Personal Investing and deadlines for handling votes via those platforms will be earlier. Edinburgh Worldwide and Impax said platform deadlines for their votes could be as early as 30 March and 10 April respectively.

Fidelity’s deadlines are 6 April for Edinburgh and 10 April for Impax. However, Fidelity customers need to enable voting if they have not already done so and this process can take two working days. The procedure is explained here.

If shareholders vote for the tender offers, they will then have the opportunity to sell their shares back to the trusts at close to NAV. They will have to decide whether to participate or to do nothing and hold on to the shares. The trusts’ boards have warned anyone who does this that they risk finding themselves holding shares in a fund controlled by Saba and liable to have its investment strategy changed fundamentally.

If I sell my shares in the tender, what are alternative homes for my money?

Anyone who takes part in the tender offers, assuming they are approved, will receive cash in exchange for their shares. For those who might want to deploy that money into a fund similar to the one they have just sold out of, here are some options.

Edinburgh Worldwide: This fund, managed by Baillie Gifford, aims to hold transformative, high-growth companies, some of which will be unlisted. Much attention is currently focused on one such unquoted stock, Elon Musk’s SpaceX, which is the trust’s largest holding and is widely expected to float on the stock market soon. The trust’s proposals include a means to retain trust investors’ exposure to SpaceX after the tender offer. Other trusts managed by Baillie Gifford have not dissimilar strategies as well as exposure to SpaceX. They include Scottish Mortgage and the Schiehallion Fund.

Impax Environmental Markets: The obvious choice would be the open-ended fund run by the same management company, the Impax Environmental Markets fund. The fund manager is offering holders of the trust a cheaper share class in this fund if they switch. Other options include the Pictet Global Environmental Opportunities fund.

Herald: This trust invests in smaller technology companies from around the world. Fidelity has not been able to identify a directly comparable fund of any type, whether listed or unlisted, active or passive.

Popular technology investment trusts that invest beyond smaller companies include Polar Capital Technology and Allianz Technology. Both have strongly outperformed Herald over the past 20 years. Open-ended actively managed options include the Polar Capital Global Technology Fund or the Fidelity Global Technology Fund, while passive funds include the Legal & General Global Technology Index Trust.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Investment trust shares are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.