The UK investment trust industry is calling on the financial regulator to change rules to frustrate activist investors seeking to take control of the listed vehicles, intensifying the contest over the future of the 150-year-old sector.
The Association of Investment Companies said on Thursday that a tussle for control of a UK-listed investment trust had “exposed gaps which need to be addressed” and urged the Financial Conduct Authority to overhaul its rules in response.
The trade body, which represents closed-ended funds including investment trusts, said the FCA should change its related-party rules to prevent large shareholders from voting on their own proposals to appoint themselves as a trust’s asset manager.
The AIC’s petition comes ahead of a crucial shareholder vote next week at Edinburgh Worldwide Investment Trust, to decide if the board of the FTSE 250 trust is taken over by US activist investor Boaz Weinstein’s Saba Capital or if its investors accept an offer to cash out first.
The contest has been given added urgency by the fact that EWIT’s biggest asset is a stake in SpaceX, Elon Musk’s rocket company that is preparing to go public in what is expected to be the world’s biggest initial public offering.
Saba, which has invested in several UK-listed investment trusts, is seeking to replace the board of EWIT and take over as its appointed manager from Baillie Gifford.
Richard Stone, AIC chief executive, said: “Saba’s admission this week that it wants to replace Baillie Gifford and become the investment manager for Edinburgh Worldwide highlights a potential conflict of interest that the current listing rules are not designed to tackle.”
The FCA said last month it would review its listing rules for investment companies, including how they apply to board independence and related-party provisions.
But FCA executive director of markets Simon Walls told the Sunday Times that calls for it to suppress shareholder activism risked appearing “short-sighted” and “self-interested”.
Jonathan Simpson-Dent, chair of EWIT, then issued an open letter criticising the FCA’s stance and saying “retail investors deserve better safeguards from activist campaigns”.
“Retail investors deserve a system that works for them, as well as for the most powerful shareholders,” Simpson-Dent said. “I therefore welcome the FCA’s consultation later this year, though for the shareholders of Edinburgh Worldwide, any changes will come too late.”
The AIC said Saba’s push to gain control of EWIT “raises urgent questions about the nature of board independence”.
“The current listing rules need amending to ensure shareholder activism remains a positive influence in corporate culture, not a route to riches at the expense of other shareholders,” Stone at the AIC said. “Our priority is to prevent potential conflicts of interest and better protect the rights of all shareholders.”
Saba Capital said the AIC “only has one priority: to protect its paying members, who are the investment trusts and their managers, at all costs”.
The activist investor added: “Its recent self-serving actions make clear it has no interest in shareholder democracy or in holding boards and managers accountable.”
The FCA said in a statement on Thursday: “We welcome engagement on this as we’ve already announced a review looking at whether it could be clearer that our related-party and board independence rules apply to prospective investment managers and directors.”
“We want to ensure minority shareholders have the right protections against conflicts of interest in the terms under which investment managers are appointed”.
