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The UK’s Financial Conduct Authority has stepped back in an increasingly tough activist campaign targeting seven investment trusts as concerns grow over the interests of retail investors.
The FCA has contacted major retail investment sites about their communications with clients of seven investment trusts targeted by US activist hedge fund Saba Capital, according to people familiar with the situation. The regulator wants to ensure that shareholders are aware of upcoming votes on board membership in trusts.
Officials from the FCA have asked Hargreaves Lansdown, Interactive Investor and AJ Bell how they are warning clients who hold shares in investment trusts on their platforms, according to people aware of the communications.
Saba, which is run by activist investor Boaz Weinstein, has called on shareholders to vote to oust the trust’s boards, claiming the boards have failed to hold their investment managers accountable for poor performance.
The campaign could lead to one of the biggest shake-ups of Britain’s 150-year-old investment trust industry, which has £266 billion in assets under management.
Saba has proposed its own board candidates and is ultimately aiming to take over the investment management of the trusts, which are currently run by Baillie Gifford, Janus Henderson, Herald Investment Management and Manulife.
However, the investment trust industry has raised concerns that retail investors may not turn out to vote, paving the way for Saba to take over. Saba has stakes ranging from 19 per cent to 29 per cent in each of the trusts, totaling £1.5bn. Saba needs more than 50 percent of the vote in favor in each trust to win.
The FCA is closely monitoring the situation and staying in close contact with investment platforms that handle communications with investors in investment trusts, according to a person briefed on the matter.
However, the rules governing votes to remove and appoint directors of investment trusts are set out in the Companies Act and not FCA regulations, so the watchdog had ruled that for now these were internal matters for trusts, their boards and investors, the person. added.
The Association of Investment Companies, the trade body for the sector, has written to the FCA raising concerns about protecting shareholder interests.
“With so much at stake, the regulator cannot just rely on people doing the right thing,” said Richard Stone, chief executive of the AIC. “When significant changes to an investment trust are proposed, platforms should actively contact their clients to encourage voting.”
Stone called on the FCA to review how board independence is defined under its listing rules. He said Saba’s campaign to take control of the boards of the two investment trusts and also become their asset manager raised potential conflicts of interest.
The seven trusts Saba is targeting are Baillie Gifford US Growth; Edinburgh Worldwide Investment; Keystone Positive Change; Small European Companies; Henderson Opportunities; Herald Investment; and CQS Natural Resource Growth and Revenue.
Hargreaves Lansdown and AJ Bell said they had written to the trusts’ shareholders to encourage them to vote. Interactive Investor said it had also taken steps to enable customers to vote. The FCA declined to comment.
