Saba的最新代理权之争：投资者需要了解什么

Saba Capital is a controversial closed-end fund activist.  Investors need to evaluate each situation on a case by case basis.

Pressure will often reduce the NAV discount and drive improved corporate governance. However, they often exit positions quickly, leaving the fund no better off in the long run.

Saba has had to go to court against major asset managers such as BlackRock over corporate governance issues.

In some cases, retail investors might hold a fund for yield alone, or tax benefits, and be less concerned with maximizing total return on an annualized basis.

Saba Capital is known both for its high yield credit and its closed-end fund strategies. Lately, it is the Saba's closed-end fund activism that has stirred the most controversy. Saba has $4.2 billion in AUM according to their latest form ADV. Therefore, even in cases where it owns a large percentage of a closed-end fund and launches a high profile activist campaign, the actual position is relatively small from the perspective of the whole firm. Nonetheless, Saba spends a lot of time in court and in boardrooms, trying to get closed-end funds to close their NAV discount and change corporate governance policies.

Most large-cap listed companies elect directors annually. In contrast, a lot of closed-end funds divide the board into classes that serve staggered terms, with one class coming up for reelection each year. This makes it more difficult for a shareholder to come in and drive change in management. At the very least, it requires a group of shareholders to go through several years of proxy battles in order to take over management. Oftentimes, management in closed-end funds has little or no investment in the funds that they manage, so without some activist pressure, they are unlikely to always do the best thing for shareholders. Pressure from activism generally drives management to improve performance, and lower fees, and make other positive changes. Yet, other times activists leave the fund with proxy campaign expenses, exiting in a tender offer that closes the NAV discount temporarily and leaves the fund no better off in the long run. Closed-end fund activism has plenty of critics.

Outside retail investors should evaluate each activist situation on a case by case basis, considering the fund's position in their overall portfolio. Sometimes, an investor might invest in closed-end funds for a specific objective other than maximizing long run total return. For example, with municipal bond funds, they may have particular tax objectives. In other cases, they might hold a fund for yield with little concern for long-term capital gains.

Coattailing activists can be lucrative, but it requires constant monitoring positions to make sure the activist isn't making a quick exit. Usually, it makes sense to build a position right as the activist is building a position. Funds will often conduct self-tender offers as a way of driving activists away, closing the NAV discount at least partially, so even if a campaign is unsuccessful, outside investors can still profit. Sometimes, an activist will drive a successful liquidation or improved long run performance through reduced fees as well. Regardless of activist involvement, it's best to avoid funds with questionable assets or excessive leverage.

In this article, I provide updates on the top proxy campaigns that Saba initiated and ran in the third quarter of 2019.

Western Asset Global High Income Fund (EHI) invests primarily in high yield debt around the world, including emerging markets, and in investment-grade securities. Its benchmark consists of 1/3 Bloomberg Barclays U.S. Aggregate Index, 1/3 JP Morgan Emerging Markets Bond Index Global, and 1/3 Bloomberg Barclays U.S. Corporate High Yield - 2% Issuer Cap Index. EHI's objectives are primarily high current income and, secondarily, total return.

Its portfolio investments as of the most recent annual report were 47.4% in the US, 5.2% in Brazil, 5.1% in the UK, with the remaining spread out between a mix of 20+ in developed and emerging markets, none accounting for more than 5% of the total portfolio. The fund yields just under 7.7%.

This snapshot shows the exposure across sectors:

This chart shows the exposure by type of investment (compared to its benchmark):

EHI's NAV return was 6.90% in the most recent fiscal year. Their overweight positions in Petrobras (NYSE:PBR), PetSmart, Dish DBS Corp., Altice Luxembourg SA, Ecopetrol SA (NYSE:EC), Citigroup, Inc. (NYSE:C), and Barclays Bank PLC (NYSE:BCS). Significant exposure to Argentina's dollar-denominated bonds detracted from returns.

Saba owns around 18% of outstanding shares as of the latest 13D. They are using a contested proxy to trying to get two representatives on the board and to declassify the board. Saba has criticized management for its perpetually high discount. Here is what the five-year Price and NAV chart look like.

Additionally, Saba criticized high fees. EHI's total expense ratio is 2.54% partially because the management fee is charged on borrowings rather than just net assets. If they only charged this fee on net assets, the fee would be much lower. Additionally, Saba has criticized the fund's overall performance, pointing out that Broadridge rated them in the lowest category of similarly situated funds. Also, EHI's largest position at one point was in Argentina's government bonds, so management has been taking a lot of risks.

Management and the board do not own material amounts of shares in EHI. Only one director owns over $100,000 in shares. The Chairman owns less than $10,000 worth of shares according to the information in the proxy. However, Management pointed out that the Fund's 1-, 3-, and 5-year returns are above peer Lipper Peer Group averages, and its 1-,3-, and 10-year returns are above benchmark returns. Additionally, the Fund's discount has declined partially from 16% in December 2018 to 8%. This has been the result of reduced expenses and share repurchases, which were driven by pressure from Saba. Management did not specifically address why they need to maintain a classified board. They believe Saba is short-term oriented and should not have representatives on the board.

The story at Western Asset High Income Fund II (NYSE:HIX) is similar to EHI. HIX follows a similar strategy - primarily investing in high yield debt. HIX's primary objective is current income and its secondary objective is capital appreciation. Its mandate specifies that up to 35% of total assets can be in emerging market countries, up to 30% of assets can be in zero coupon securities and PIK bonds, and up to 20% of its assets in equity. HIX achieved a 6.77% in the most recent fiscal year.

Saba owns around 13% of outstanding shares as of the latest 13D. As with EHI, they are trying to get two representatives on the HIX board and to declassify the board. They are critical of the high fees and persistent discount. HIX was also exposed to Argentina's bonds and rated in the lowest category for similarly situated funds according to Broadridge.

HIX management and directors do not have any material investment in the fund. In fact, no director owns more than $100,000 in shares, and the chairman owns less than $10,000 worth. However, they point out that the 1 and 3 returns are above Lipper peer group averages, and 1-, 3-, and 10-year returns are above benchmark. The five average annualized yield has been 8.72% (and that is probably what most investors are focused on).

I covered the investment strategy and proxy drama at Neuberger Berman High Yield Strategies Fund (NHS) in greater detail earlier, prior to the shareholder meeting. After the meeting, things got weird. Saba put forward three proposals including (1) adding Saba representatives to board, (2) terminating the management contract with Neuberger Berman, and (3) conducting a self-tender offer. Saba's three proposals all won a majority of votes including Saba's shares, but only one proposal (a self-tender offer), technically passed. The other two proposals would have required 90% of votes cast at the election to pass. Neuberger Berman put out a press release saying that shareholders resoundingly rejected Saba's proposals. The self-tender offer proposal is non-binding, and Neuberger Berman says they will evaluate. Saba, in contrast, claims victory.

What does this mean for investors? Management has kind of exposed its questionable attitude towards the shareholders in the fund. Saba's representatives each received 2 million more votes than any of the Neuberger nominees, yet management is claiming they were resoundingly rejected. It's understandable they want to fiercely defend the management contract, and it's not entirely convincing that they should lose it or that the fund should be liquidated. Nonetheless, the press release they put out after the meeting was deceptive. Given the fund trades at a discount, the self-tender offer would be accretive to investors who stay in the fund. However, it's still not guaranteed that they will pursue it. The fund trades at a very tempting high yield, but it comes with more than its share of risk, and this battle doesn't seem to be helping.

BlackRock New York Municipal Bond Trust (BQH) is a microcap closed-end fund that invests in New York municipal bonds. It has a 3.87% distribution rate that is triple tax-free for New York residents.

Saba submitted a nonbinding shareholder proposal to declassify the board, allowing for annual election of directors at annual meetings instead of the current staggered board in three classes

Based on proxies submitted to the independent inspector of election, Saba believes the proposals passed with resounding support. Strangely, BQH management delayed the reporting of these results. Saba reported the same issue at BlackRock Muni New York Intermediate Duration Fund, Inc. (NYSE:MNE), and BlackRock Credit Allocation Income Trust (NYSE:BTZ) as well when they contested the proxies in at those funds earlier this year as well. Saba has continued to buy after the shareholder meeting. There is no guarantee they will keep doing this, but if they do, it should keep pressure on the discount.

Saba has been sparring with BlackRock in court over proxy access of BQH and other various BlackRock funds. Bylaws at BlackRock funds make it easy for an uncontested incumbent to maintain a seat and extremely difficult for a shareholder nominee to win a seat.

BQH trades at an 8% discount. It likely only makes sense as an investment for a narrow subset of investors with New York residency and specific tax needs.

Nuveen Ohio Quality Municipal Income Fund (NUO) invests in municipal securities that are exempt from federal, Ohio, state, and local income taxes. At least 80% of its assets are investment-grade. It is also allowed to invest up to 10% of its managed assets in securities rated below B-/B3. Total expense ratio is 2.34% according to CEFConnect. That includes 1.28% of interest expense on leverage. The distribution rate is just over 3%.

Distributions have been remarkably steady since inception:

Instead of relatively steady performance, NUO has traded at a chronic discount.

As of the most recent 13D, Saba owns approximately 8.7% of outstanding NUO shares. Saba is attempting to get three trustees nominated to the board and is attempting to declassify the board so that all nominees must run for reelection each year.

Management and directors do not own any shares in the fund. However, they contend that the discount is a buying opportunity and is not reflective of the fund's performance. They also point out that in addition to the steady distributions, NAV has increased 20% since the fund's inception in 1991. As with the other municipal debt funds, the incentives of shareholders probably depend on their residency and tax situation.

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.