The Tip Sheet

The Saba Saga dominates the Tip Sheet with The Telegraph strongly defending the track records of two of the US activist’s targets— Herald (HRI) and The European Smaller Companies Trust (ESCT). As The Telegraph points out, HRI is a great success story that has turned £1000 at launch in 1994 to £24,200 today, while, ESCT has beaten its benchmark in 12 of the last 13 years.

By Frank Buhagiar

Questor – One of the great success stories of the UK’s investment industry is under attack

No prizes for guessing the above Telegraph article focuses on one of the seven funds currently being targeted by Saba Capital. Herald Investment Trust (HRI) launched in 1994, £65m was raised to plough into global small-cap technology and communications stocks. A further £30m was subsequently raised in 1996. Fast forward to today and HRI has grown its assets to around £1.2bn and that’s despite returning hundreds of millions to investors via share buybacks on the way. The share price performance is equally impressive: a £1,000 investment at launch would now be worth £24,200 or £26,000 had warrants that came with the original share issue been exercised. As Questor points out “That is a long way ahead of the return that you would have achieved tracking the UK small-cap market or even a US small-cap technology index.”

And yet, despite producing the goods for long-term investors, HRI is one of the seven investment trusts in which Saba Capital has accumulated a large stake in (20%) and is one of those named by the US activist in its 18 December 2024 announcement calling for general meetings to be held and wholesale changes to the Board to be made. Saba’s plan appears to be to replace the current directors with its own nominees, become the investment manager and change the mandate to one that targets other UK-listed trusts, “As a minimum, it seems to want to force these companies to give it a cash exit at NAV, which is likely to make it a fast buck”.

Notwithstanding the loss of a much-needed and respected investor in the UK technology sector— UK stocks account for 35% of the portfolio—Questor believes the Saba attack needs to be seen off by shareholders because “taking a longer-term view, the performance gap between small cap and large cap tech seems overstretched. The existing investment approach could deliver attractive returns in the coming years and prove far more lucrative than Saba’s self-serving agenda. Shareholders in Herald and the other Saba targets need to ensure that their voice is heard, and this US corporate raider is sent off with its tail between its legs.” Strong stuff and with good reason.

Questor – Europe is in a mess – here’s how to take advantage

HRI, not the only member of the Saba Seven to get a favourable write-up from Questor. So too, The European Smaller Companies Trust (ESCT). Like HRI, ESCT invests in small-cap stocks and like HRI, it has done a good job of it too. Since July 2011 when Janus Henderson’s Ollie Beckett took over as manager, the portfolio has returned +263%, easily beating the +176% generated by the MSCI Europe ex UK Smaller Companies index. In all, the fund has beaten its benchmark in 12 of the last 13 years and over the past decade is the second-best performing European-focused investment trust.

That stellar record, testimony to the manager’s approach that is centred around identifying mispriced stocks from a pool of around 2,000 companies with sub-€7bn (£5.8bn) market caps at the time of investment. It’s an approach that is style agnostic, namely there is no ‘growth’ or ‘value’ focus which in practice means it has a higher exposure to ‘value’ stocks than its more growth-oriented peers.

But, as Questor points out, that strong track record is under threat following Saba’s stake building— Saba says it owns 29.1% of the fund—particularly if the activist investor gets its own way at the upcoming general meeting. As with HRI and the other five funds, Saba is looking to appoint its own directors “then through them impose its will on minority investors. To achieve this, it needs the support of over 50% of those voting.” Bearing in mind the fund’s track record “Questor would be surprised if the shareholders that have stuck by the European Smaller Companies Trust through the lean times would wish to lose the prospect of a recovery in its fortunes.” The stakes are therefore high and nothing can be taken for granted. That’s why “it is important that shareholders vote, as Saba is likely relying on a low turnout to boost its chances of winning.” Shareholders, you have been warned.