Activist Pressure and the Evolution of UK Investment Trusts: Governance Reforms Drive Value Creation

The UK investment trust sector faces a pivotal moment as activist hedge fund Saba Capital intensifies its push to overhaul the structural foundations of these closed-ended funds. By demanding the conversion of targeted trusts into open-ended vehicles or exchange-traded funds (ETFs), Saba has reignited debates about governance, liquidity, and shareholder value. This campaign, marked by strategic shifts and sector-wide reforms, underscores how activism can catalyze structural change in an industry grappling with eroding investor confidence.

### The Campaigns and Strategic Shift
Saba's current focus on four trusts—CQS Natural Resources Growth & Income (CYN), European Smaller Companies Trust (ESCT), Middlefield Canadian Income (MCT), and Schroder UK Mid Cap (SCP)—represents a tactical pivot from its earlier board-replacement strategy. Having failed to secure board seats in seven previous campaigns, Saba now seeks to eliminate persistent NAV discounts (currently averaging 16% in 2025 vs. 2% in 2021) by pushing for structural conversions. The hedge fund holds stakes exceeding 29% in three of the four trusts, leveraging its influence to demand open-ended structures that would allow investors to exit at NAV, erasing discounts caused by illiquidity.

This approach reflects a broader recognition that activism must align with shareholder priorities. As Saba noted, “Thoughtful feedback” emphasized liquidity over boardroom control. The withdrawal of three requisitioned shareholder meetings—replaced by constructive negotiations—suggests a maturing dialogue between activists and management.

### Outcomes and Sector-Wide Reforms
The campaigns have already yielded tangible results. Middlefield Canadian Income (MCT) became the first UK investment trust to propose rolling into an actively managed ETF, offering shareholders liquidity at NAV. European Smaller Companies Trust (ESCT) agreed to a tender offer enabling exits at NAV, while Schroder UK Mid Cap (SCP) cut fees, introduced triennial continuation votes, and launched buybacks to address discounts.

These outcomes highlight a sector in transition. Even non-targeted trusts, such as Henderson Opportunities and Foresight Solar, have preemptively adopted blended fee models and buyback programs to stave off activism. The Association of Investment Companies (AIC) has amplified calls for governance reforms, including the FCA's review of board independence rules.


Data visualization showing a narrowing discount post-Saba's engagement.

### Challenges and Considerations
Not all changes are smooth. Saba's requisition for Schroder UK Mid Cap was initially deemed defective, underscoring legal complexities in UK corporate governance. Meanwhile, trusts like the Bankers Investment Trust briefly considered anti-activist defenses before retreating, revealing tensions between defensive measures and shareholder transparency.

Critics argue that open-ended structures risk destabilizing trusts with illiquid assets, though Saba has focused on funds with liquid portfolios. The success of Middlefield's ETF transition suggests such reforms can work when aligned with asset type.

### Investment Implications
For investors, Saba's campaigns offer both risks and opportunities:
1. Trusts with Wide Discounts: Consider positions in targets like CYN or ESCT, where activism-driven reforms could narrow discounts and boost valuations. Monitor NAV discount trends closely.
2. Structural Converters: Firms like MCT, which have embraced ETF conversions, may see premium valuations post-restructuring.
3. Sector-Wide Trends: The broader UK investment trust sector faces a reckoning. Funds that preemptively adopt liquidity solutions (e.g., fee reforms, buybacks) may outperform laggards.


Data visualization illustrating the growing premium for liquid instruments.

### Conclusion
Saba's activism has transformed from a disruptive force into a catalyst for governance evolution. By prioritizing liquidity and structural reform over boardroom battles, the hedge fund has nudged UK investment trusts toward models that better serve shareholders. While challenges remain, the sector's proactive responses—fee adjustments, ETF transitions, and regulatory reviews—signal a path toward resilience. Investors should view this not as a mere proxy war but as a generational shift in fund structures, favoring those who adapt swiftly to activist-driven change.

In an era of declining trust in traditional financial vehicles, Saba's campaigns may yet prove a tonic for an industry in need of reinvention.