The activists are coming

Picture courtesy of Creative Commons

News that US hedge fund Saba Capital Management has taken positions north of 5% in a dozen UK investment trusts has been met with public silence from the trusts concerned. But you can be sure that in the boardrooms of those trusts the wagons are being formed into a circle.

Saba is a successful US activist fund that invests in credit default swaps, debt and equity, in additionto closed-ended funds trading at substantial discounts to NAV. Why should UK investment trusts care about this? Because Saba has seen a high level of success in turning around underperforming funds in the USA, and has done so both by collaboration and byconfrontation. Its latest step in the UK firmly follows the confrontation model.

European Opportunities Investment Trust is a FTSE 250-listed trust, investing in companies across Europe. Its largest holdings include Novo Nordisk, Bayer, Deutsche Borse and Experian. It trades at a19% discount to NAV, and Saba has pounced.

In an open letter to the chairman on October 20 th , Saba called EOT’s plans for a performance-related 25% tender offer ‘woefully insufficient’ and said it would vote against continuating the investment trust at the annual general meeting next month.

Appealing directly to shareholders, Saba wrote: “The idea that an investment adviser should onlyprovide an option for shareholders to redeem 25% of their investment, if the fund underperformsfor another three years, puts the interest of the fund’s manager ahead of shareholders.”

As the dire conditions in UK markets show no sign of ending, this may be the first of many aggressiveattempts to realise value from underperforming assets, sending the normally clubby and risk discrete world of investment trusts into panic.

So how should investment companies – or any listed entity, for that matter – deal with activists? Put bluntly, if the activist campaign has begun, it is probably too late for the Board and management to emerge unscathed. Most activists are not naked asset strippers; instead they seek to unlock value that they perceive the incumbent management has left on the table.

When an activist strikes, boards and management will be swamped by the need to take complex and technical advice from legal, compliance, financial and banking advisors; but the battle for hearts and minds has likely already been won and lost by the time the activist arrives on the shareholder register. A combination of outstanding financial communications and best in class investor relations should be in place and the normal way of conducting business. When the attack has begun, it is too late to look to these fundamentals. But if they are in place, they can be a great reassurance and guiding light for management teamstrying to put their case against an aggressive opponent.

Here are five tips to manage panicking Boardrooms when times are turbulent:

1. Keep your eye on the prize. Unless the company is undergoing a fundamental U-turn, your strategy is just as valid as it was when it was set. Remind the Board of the strategy and the investor story.

2. Keep talking to your shareholders. When volatility hits, it can be accelerated by lack ofcommunication. Open, transparent and honest conversations are a great way to mitigate uncertainty.

3. Quiz the finance team on the precise impact of any uncertainty on the top and bottom lines,and how they intend to explain it. Understand the market forces, and how they are responding touncertainty. Then apply the investor story, and check it for validity. Chances are it remains strong.

4. Put yourself in your investors’ shoes: What is their greatest concern? How is their portfolio behaving? What is their greatest fear in the current environment? It is likely that your own investor presentation and story can reassure them that your stock is a stable element in their investments.

5. When uncertainty rises, being steadfast in the pursuit of business strategy is a differentiating factor. BAU can become a USP in uncertain times. Try to use this counter-intuitive truth to inform and enhance your investor relations.

Activist investors are not going away. Their new-found profile should be a nudge to Boards to look totheir communications and investor relations. They are the best insurance policy against the attack of the activists.