Evaluating SABA’s Managed Distribution Plan: Sustainability and Tax Implications

The Saba Capital Income & Opportunities Fund II (SABA) has long marketed its managed distribution plan (MDP) as a way to deliver consistent monthly payouts of $0.058 per share. However, a closer look at the fund’s recent disclosures reveals a troubling trend: the increasing reliance on return of capital (ROC) to sustain these distributions. For the fiscal year-to-date as of May 31, 2025, 60.02% of cumulative distributions were classified as ROC, while only 39.98% came from net investment income [1]. This shift raises critical questions about the long-term viability of SABA’s strategy and the tax implications for investors.

The Mechanics of SABA’s MDP

SABA’s MDP is designed to maintain a fixed distribution rate regardless of its underlying investment performance. When investment income and capital gains are insufficient to cover the $0.058-per-share payout, the fund turns to ROC—a practice explicitly outlined in its filings [1]. While this approach ensures short-term predictability, it masks a deeper issue: ROC does not represent income or gains but rather a return of shareholders’ original capital. Over time, this erodes the fund’s asset base, potentially undermining its ability to generate future returns.

For example, the June 30, 2025, distribution was estimated to include 71.22% ROC [1]. Such a high proportion suggests that SABA is effectively returning shareholders’ money rather than distributing earnings. This dynamic is not unique to SABA but is a common feature of closed-end funds with aggressive distribution targets. However, the lack of transparency in historical data—specifically, net investment income and expense ratios from 2020 to 2024—makes it difficult to assess whether this trend is recent or part of a long-term pattern [2].

Tax Implications and Investor Risks

The tax treatment of SABA’s distributions is another area of concern. While net investment income and long-term capital gains are taxed in the year received, ROC is not immediately taxable. Instead, it reduces the investor’s cost basis, which can lead to higher capital gains taxes when shares are sold [1]. For instance, if an investor holds SABA shares for years, the cumulative ROC distributions will lower their cost basis, amplifying the taxable gain upon sale.

This complexity is compounded by the fact that the final tax characterization of distributions is only determined at year-end and reported on Form 1099-DIV [1]. Shareholders must wait until early 2026 to understand the tax implications of 2025 distributions, creating uncertainty for tax planning. Advisors caution that investors should treat SABA’s payouts as a mix of income, gains, and ROC, rather than assuming they are entirely taxable income [1].

Sustainability Challenges

The long-term sustainability of SABA’s MDP hinges on its ability to generate sufficient investment income and manage expenses. However, the fund’s financial filings from 2020 to 2024 are notably absent from public records, leaving a gap in understanding its historical performance [2]. What is clear is that SABA’s strategy—investing in SPACs, reinsurance, and debt instruments—carries inherent risks. These assets can be volatile, and the fund’s use of leverage further amplifies potential losses.

Moreover, the fund’s expense ratios, while not disclosed in detail, are likely to impact net investment income. High fees could erode returns, forcing SABA to rely even more heavily on ROC to meet its distribution targets. This creates a self-reinforcing cycle: as ROC increases, the fund’s asset base shrinks, reducing future income potential and necessitating further ROC distributions.

Conclusion

SABA’s MDP offers the allure of consistent income but comes with significant caveats. The growing reliance on ROC signals a shift from income-based distributions to capital erosion, which may not be sustainable over the long term. Investors must weigh the benefits of fixed payouts against the risks of reduced capital and complex tax implications. Without access to historical financial data from 2020 to 2024, it remains unclear whether this trend is a recent anomaly or a structural issue.

For now, SABA’s strategy appears to prioritize short-term predictability over long-term value preservation. Investors should consult tax advisors to navigate the unique tax treatment of ROC and consider diversifying their income portfolios to mitigate the risks of overreliance on a single distribution model.

Source:
[1] SABA Announces Notification of Sources of Distributions [https://www.businesswire.com/news/home/20250630966442/en/SABA-Announces-Notification-of-Sources-of-Distributions]
[2] Saba Capital Income & Opportunities Fund II Financial Ratios [https://www.macrotrends.net/stocks/charts/SABA/saba-capital-income-opportunities-fund-ii/financial-ratios]