- The US Securities and Exchange Commission’s Robert Jackson hopes to prevent the kind of closed-end fund activism that funds like Boaz Weinstein’s Saba Capital have engaged in.
- Jackson, in an interview with Business Insider, said the SEC needs to protect the retail investors who choose closed-end funds for the fixed payouts the structure offers, and hopes to get the issue in front of the full commission before the end of the year.
- “I’m not interested in protecting funds. I’m interested in protecting investors,” the SEC commissioner told us.
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The closed-end fund activism that Boaz Weinstein’s Saba Capital made famous has gotten the attention of securities regulators.
Robert Jackson of the Securities and Exchange Commission told Business Insider that getting the issue in front of the SEC’s full body was a priority for him — one he hopes to push forward before the end of the year. The chairman of the SEC, Jay Clayton, sets the agenda for what the commission will hear, and Jackson acknowledged that the timing will depend on Clayton’s priorities.
“I’m not interested in protecting funds, I’m interested in protecting investors,” said Jackson, who noted that the “millions” of retail investors in closed-end funds are not interested in the short-term gains activist campaigns run by Saba and other hedge funds are looking to provide.
Closed-end funds’ shares trade like stocks, allowing hedge funds to build large stakes and force changes to the funds’ boards, often through proxy fights, which can result in funds liquidating for a quick return. On top of the time and money asset managers need to spend on proxy fights, liquidations can hurt their fee revenue, and activists can force them to pay out dividend-like tenders.
Asset managers like BlackRock, Neuberger Berman, and Legg Mason have tried to fight Saba in court and public opinion, but have so far been unsuccessful in stopping Weinstein and his peers. Closed-end funds have a fixed number of shares, and the price per share can sometimes decouple from the value of the underlying securities, making them an attractive mark for activists.
One lawyer at an asset manager who asked not to be identified because it is in the midst of a campaign said their firm has asked the SEC to curtail the practice.
“Frankly this is something the SEC has to care about,” the person said. “This isn’t constructive activism.”
Hedge funds involved in the space push back on this criticism, however. The average closed-end fund trades at a price nearly 4% below the value of its holdings because of the fees and structure of the funds, hedge funds argue, and activism campaigns often push the share price closer to what the holdings are worth.
Funds that prevent activists, either through majority ownership by the fund creator or through rules written into their charters, often have the greatest discounts. Bill Ackman’s closed-end fund Pershing Square Holdings, which trades in the Netherlands, trades at a price more than 20% below what the holdings are worth, and is immune to activists thanks to Ackman’s majority stake in it.
“Closed-End funds with discounts to [net asset value] above 20% year after year have one thing in common — their investors are trapped due to conditions put in place by the manager to prevent activism. If activism were to be curtailed broadly, the immediate loss to mom and pop shareholders would likely be in excess of $40 billion. Through activism, managers can be compelled to reduce fees and narrow discounts, thereby improving long-term returns and liquidity for all market participants,” said Weinstein, in a statement provided to Business Insider.
For his part, Jackson is taking the side of the closed-end fund providers, telling Business Insider that the retail investors are not interested in a quick bump in the trading price.
“[Hedge funds’] best argument is ‘why can’t we be free to buy as many shares as we want and redeem them at a higher price?'” said the commissioner, who is expected to leave the regulator sometime this fall. “And my response to that is that’s not the deal retail investors signed on to when they invested, and I’m here to protect them, not hedge funds.”
Before Trump-appointed Jackson joined the SEC in January 2018, he had co-authored a paper on closed-end activism that found it often led to the liquidation of funds — something Jackson believes harms retail investors.
Funds like Saba point to the fact that closed-end funds that do liquidate give investors the chance to exit the fund at the highest value possible, and then re-invest in products with lower fees and similar payouts, like open-end mutual funds or ETFs.
A Morningstar report found that closed-end funds have fees that are significantly higher than their open-end counterparts, even when adjusted for the additional leverage that closed-end funds can use.
Weinstein, whose fund runs more than $1.7 billion, has already beaten BlackRock in court, and has the backing of some of the biggest names in finance, counting Blackstone as an investor. The firm has not slowed down, even in the face of growing animosity from the asset management industry — Saba recently took a large stake in Eaton Vance’s Floating Rate Income fund, which has $130 million in assets.
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