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“Have youUSNAVNAVNAVNAVNAVNAVNAVNAVYour browser does not support the element. no shame?” cried Boaz Weinstein during a presentation to investors on January 14th. The boss of Saba Capital, an American hedge fund, was railing at fund managers in Britain’s venerable investment-trust industry. Mr Weinstein has picked seven trusts, overseeing £4bn ($5bn), whose performance he deems so abysmal that both boards and managers must be fired. Saba has bought stakes in each and sought votes to oust their boards. If successful, it will appoint new directors and seek to manage the trusts itself. At the first such poll, held on January 22nd, shareholders rejected Mr Weinstein’s overtures. Six more chances remain.Saba’s victims are a small slice of a sector that invests £270bn, but their fate will reverberate across it. Their managers—Baillie Gifford, Janus Henderson, Manulife and Herald Investment Management—include some of British asset management’s biggest names. More important, other trusts share their vulnerabilities, and Mr Weinstein is raring for a broader assault.He is certainly right on one count: recent performance has been lousy. Saba points out that, in the three years before it started buying stakes, six of the seven trusts had underperformed their benchmarks. The worst laggard, Baillie Gifford’s Growth Trust, had done so by more than 50 percentage points. Its managers might quibble that this timeframe was cherry-picked to begin at the peak of a mania for growth stocks, which was followed by a broad crash. But that would not defang Mr Weinstein’s second argument: that as well as dismal returns, poor management has caused the trusts’ market value to drop well below the net asset value () of their holdings. If Mr Weinstein succeeds in seizing the reins, he promises to close these “ discounts” and provide quick profits to shareholders.The discounts are possible because of the strange structure of trusts. They are “closed-end” funds, which means they invest permanent pools of capital that investors cannot tap directly. Instead, the investors own shares in a firm—the trust—that manages the capital. If they want out, they must sell their shares on the market rather than asking the trust to liquidate assets and give them back their money, as they would with an “open-end” fund. This allows trusts to trade less frequently, lowering costs. They can also invest in assets that cannot easily be sold. These include shares in unlisted firms, such as Elon Musk’s SpaceX, that retail investors might otherwise struggle to own.A quirk of this structure is that a trust’s shares can trade at a price which differs from their . The shares of those chosen by Saba have all been trading much lower, with average discounts over the three years before the campaign began ranging from 12% to 15%. It is a damning verdict on the trusts’ managers that their portfolios would be worth more if they were carved up and sold for parts. For Mr Weinstein, it also marks a failure of the trusts’ boards. They could have improved matters by ordering managers to sell some assets and use the proceeds to buy back shares at a price close to their . Saba’s campaign has spurred several to do so; share prices have duly risen and discounts narrowed.If Mr Weinstein prevails, he promises to go further. He will liquidate more holdings to give investors more chances to sell at prices close to . Then he will roll out his strategy, buying other trusts that are trading at a discount. The pickings look rich: at 15%, the discount at the average British investment trust is even higher than among the group Saba is currently targeting. Investors could either quit via the buy-backs or stick around for the ride.Naturally, the trusts are urging shareholders to turn away Mr Weinstein. Their best argument is that his proposals have little to do with why investors handed over their money in the first place: to hold shares in high-growth firms for the long haul. Anyone investing in such a strategy must be prepared to tolerate spells of poor returns. Even then, for those with steady nerves and a Machiavellian streak, there is a trade here. They could sell to Mr Weinstein at close to , then reinvest in other, similar funds run by the original managers. Just so long as they are still in business.
