3rd July 2026
Regular readers of our blog will know we have adopted a pragmatic attitude towards activists in the investment trust sector over recent years believing a variety of conditions have allowed them to enter the sector that could have been prevented with some more proactive actions towards discount management. Saba Capital has been the most active in the sector and we believe their involvement has sped up the much-needed consolidation in conventional equity sectors. The classic and uncontroversial playbook for activist investors has been adopted for most of their targets. In simple terms, buy shares at a wide discount, hedge underlying beta risk, agitate with the board and manager, sell shares at a narrower discount, rinse and repeat. However, we acknowledge that the alleged desire by Saba to take control of the investment management of a select number of trusts (e.g. Herald, Impax Environmental, Edinburgh Worldwide) is potentially unorthodox and has taken the sector by surprise. It is these actions that have been widely criticized and caused some immense upheaval, even though they’ve seemingly done nothing illegal.
Whether caused by Saba’s actions in the aforementioned trusts or not, in March the FCA announced it was reviewing shareholder rights and potential conflicts of interest in the current UK Listing Rules. Last week, the FCA published CP26/21, a consultation paper on proposed changes to UK Listing Rules for closed-ended investment funds (this year marks my 25th anniversary of investing in the sector, so I can’t get used to calling them anything other than investment trusts). The press release from the FCA (link here) points out the unique structure of investment trusts operating as both listed companies and investment vehicles. As a listed company, shareholders appoint a board, which in turn appoints and oversees the investment manager responsible for delivering returns. Shareholder rights are therefore central to this model, enabling investors to hold boards to account and to influence key decisions. This has always been a big point of difference when comparing investment trusts with open-ended fund equivalents where regular engagement with boards is central to our investment process.
The general objective of the review is to ensure that investment trust boards act independently of investment managers and in the interests of all shareholders, while addressing potential conflicts of interest that may arise as a result of the demands of a large shareholder. At the same time the FCA are at pains not to blunt the healthy role activism can play in the sector. Therefore the consultation paper focuses on the independence of the director (from the investment manager or proposed investment manager); expanding the definition of a related party to include a proposed investment manager; and the process of voting on changes to fees or investment policy (that could disadvantage minority shareholders). Protecting minority investors from ending up in a trust with a new mandate not of their choosing or being forced to exit prematurely as a result of the actions of another minority investor can only be a good thing. We have commented before about the unintended consequence of the FCA’s relaxation of the related party rules in 2024 where, in the case of Third Point, a substantial shareholder that was also the investment manager, was able to vote on something as fundamental as a change of mandate.
The consultation paper has a shorter time frame than usual with responses sought by 14th August. It is aimed at directors of investment trusts, managers of investment trusts (existing and potential), substantial shareholders with more than a 20% holding, investment trust corporate brokers, and investment trusts investors (both retail and institutional). Basically everyone involved in UK financial markets with an interest in the investment trust sector! There are important points for us all to consider and we would encourage as many people as possible to submit views. Please visit the FCA’s paper (link here). Your views can also be expressed via the AIC who will be making their own submission on behalf of its members (AIC press release here).
The most important outcomes we hope to arise from this process are the protection of minority shareholders and the ability to control obvious conflicts of interests, without blunting the effective and necessary role activists can play. We applaud the FCA’s ambition in this regard.
Daniel Lockyer – Senior Fund Manager
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