Baillie Gifford US Growth Trust 'risk' of 'sleepwalking' warning

US hedge fund manager Boaz Weinstein’s Saba Capital Management is seeking to install three individuals it has nominated to the board of Edinburgh-based Baillie Gifford US Growth Trust, of which it owns about 29%. It has tabled resolutions to appoint Jason Chen, James Waterlow and Thomas McGlade at today’s AGM of the investment trust.

Baillie Gifford chief executive Tim Campbell told The Herald in an exclusive interview late last month that it would be “incredibly sad” if Saba succeeds in its move on this major Scottish-based investment trust, which had total assets of around £1.1bn at September 30.

He declared Baillie Gifford US Growth, managed from Edinburgh by the investment house he heads, has done an “amazing job” for shareholders.

The holdings of Baillie Gifford US Growth, which is a corporate broking client of Panmure Liberum, include Elon Musk’s SpaceX, artificial intelligence giant Anthropic and payments platform group Stripe.

Panmure Liberum rightly highlights the importance to shareholder democracy of investors turning out to vote, in the context of Saba’s large stake in Baillie Gifford US Growth.

And it contemplates what would be likely to happen in the event that Saba gets its way at the AGM.

Referring to Baillie Gifford US Growth as “USA”, Panmure Liberum says in a note of which research analyst Callum Stokeld is lead author: “USA shareholders are being asked once again to affirm their support for the strategy at the forthcoming AGM, after the trust's largest shareholder proposed three new directors. They have already resoundingly done so on two previous occasions in the past 18 months, but given voting rules and the [circa] 29% to 30% voting stake of the proposer of the requisitioned resolutions, the risk seems clear that shareholders who have previously actively backed the board and managers via their voting rights find themselves passively pushed into a structural change they did not seek or desire.”

It adds: “With no details or proposals on how a post-vote vehicle may change, this would represent a step into the dark, but, based on precedent in the US and with liquidity events substantially subsidised by the managers already having been rejected, it seems to us clear that, should the proposals pass, dissatisfied shareholders will have no exit mechanism other than open-market transactions. The exercise of shareholder democracy takes on increased importance, in this light, and we think it imperative that shareholders exercise their voting rights, however they choose to do so and however small or large their holding.”

Surely, it is difficult to disagree with the importance of shareholders, whatever their size of stake, having their say in this situation.

Major investment trusts generally have very large numbers of individual, as opposed to institutional, shareholders.

Saba has shown itself to be nothing if not persistent, of course, in its drive to force change at a raft of investment trusts.

The hedge fund, having been voted down on two previous occasions by other shareholders of Edinburgh Worldwide Investment Trust (EWIT), ousted that fund’s board on April 30 and installed three US-based individuals it had nominated.

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Baillie Gifford, which has funds under management of about £200bn, remains the manager of Edinburgh Worldwide and the tender offer for shareholders which Saba, with a stake of about 30% in this trust, said it would be seeking from the new board has yet to happen.

Edinburgh Worldwide was one of seven UK investment trusts targeted in a major salvo by Saba. The US hedge fund lost all seven of these initial votes to oust the incumbent boards of these funds early last year.

However, it quickly became clear that this was not going to be an end to the matter.

When the previous board of Edinburgh Worldwide revealed on April 30 that Saba had succeeded in ousting it, it said: “In addition, a further US investment fund with a material holding has voted against the board.

“This brings the number of US investment fund shareholders not supporting the board to four, including Saba, collectively representing more than 40% of the company's issued share capital.”

It does not take complex arithmetic to work out that a huge turnout would be required from other investors opposed to Saba if the US hedge fund is not to get its way in such a situation.

With Baillie Gifford US Growth, the hurdle to seeing off Saba, should other shareholders be so minded, appears higher than even the US hedge fund's near-30% stake alone would suggest.

Asked last month about the third vote requisitioned by Saba at Edinburgh Worldwide and the stances of the other US investment funds which were highlighted by the outgoing board of EWIT, in the context of Baillie Gifford US Growth, Mr Campbell replied: “Yeah. I think we're aware that there are other funds that sort of like to follow Saba, the Saba strategy, and follow them in.

“I think they are at play in the Baillie Gifford US Growth Trust register as well, which obviously just raises the hurdle in terms of the number of non-Saba-friendly folk you need to mobilise to vote.”

Tim Campbell, chief executive of Baillie Gifford, noted Saba had been offered a tender. (Image: Gordon Terris)

Richard Stone, chief executive of the Association of Investment Companies industry body, earlier this month highlighted the stake of “another US hedge fund” in Baillie Gifford US Growth Trust.

He said: “This is a crucial vote. Given that a large proportion of shares are owned by Saba and another US hedge fund, shareholders must vote to ensure their voice is heard.”

Mr Campbell also declared last month: “We're obviously trying everything we can to mobilise people to vote, but we're also realists. It's difficult. These are retail shareholders. Not all of them know how to vote, but that's the importance of it.

“So we're doing everything we can just to encourage them to, to encourage the platforms to get the underlying clients to vote because, as we've seen from votes in the past, everyone bar Saba wants it to continue as is. Unless they actually turn out and vote, then there's a real risk that you lose that. So that's what we're right in the middle of at the moment.”

Investec has calculated that Baillie Gifford US Growth ranked third out of 124 UK-based open and closed-ended US equity funds from initial public offering to September 21 this year.

Mr Campbell said of Saba: “I think it's already been published that we offered to give them a tender at essentially NAV (net asset value) less transaction costs, which is actually miles better than what Saba themselves were offering shareholders. And us, as managers, we offered to foot the bill for that in an attempt to try and get them out.

“But again, it sort of calls out the fact that they say they're going to offer a liquidity event to underlying shareholders. They've not yet done that in EWIT and there's no guarantee that they'll do that in US Growth either.”

There is much at stake here.

And, if other investors in Baillie Gifford US Growth do want the investment trust to continue as is and resist Saba’s boardroom move, a huge turnout will be required to achieve such an outcome.