Exclusive:Scottish investment trusts under siege - Trump, Saba Capital and era of aggression

It is right that Scottish and UK governments engage constructively with the new administration, not least to continue the strong economic links that exist between our countries. This is particularly true in financial services; where Scottish experience and expertise have long played a significant role in shaping the US industry, and a string of US institutions have chosen to set up shop in Scotland to take advantages of the skills and innovation on offer.

But recent weeks have seen a less welcome intervention across the Atlantic, with several Scottish-based investment trusts coming under threat from a US hedge fund, Saba Capital, seeking to take them over.

In the late 19th century, Scotland’s burgeoning financial services industry played a vital role in promoting the use of investment trusts, a vehicle for investors of moderate means to join forces and spread their investments over a number of stocks to reduce risk over the long term. Among the first to be created was the Scottish American Investment Company, which helped British investors access American railroad bonds and other investment opportunities.

Another was the forerunner of the Edinburgh Worldwide Investment Trust (EWIT), established in gaslit, wood-panelled offices in late-Victorian Dundee. Initially christened the North American Trust Company Limited it was founded by a globetrotting Scots financier by the name of Robert Fleming, who left school at the age of 13 to work in a jute mill for an annual salary of £5. Fleming’s grandson Ian would go on achieve global fame for penning the James Bond novels, but Robert also left his mark in finance and philanthropy, being described by some as “Scotland’s Dick Whittington”. Fleming’s expertise in the opportunities afforded by the booming US markets meant that he was seen as a pioneer of investment on both sides of the Atlantic by the time he launched his new trust in 1896. It prospered from the outset, with one paper crowning it a “phenomenal success” within two years.

But these vehicles for aren’t just a figment of historical curiosity. Scotland’s expertise in the development and administration of investment trusts - with an emphasis on long-term value creation over short-term profit - has continued to this day, and the UK’s investment trust sector is now worth as much as £266 billion, with Scotland playing a leading role. More than a century on from their inception, investment trusts still allow retail investors to invest in innovative global stocks, at low fees. Not only is it a sizable and vibrant part of our sector, but it is well-known for setting high standards of governance and prioritising sensible long-term investment returns.

Saba Capital’s justification for its – in the words of one chief executive - “very aggressive” action, is that the share price of these investment trusts currently lags behind the value of their assets, therefore representing a poor return for investors. Such an analysis is not only misleading, but misses the point of the investment trust model entirely, which relies on delivering steady and sustainable compound growth over decades.

As importantly, should this hedge fund succeed in persuading shareholders to back the hostile takeovers at a series of extraordinary general meetings over the coming weeks (with one last week resulting in shareholders in the Herald investment trust blocking the attempted takeover), it would totally change the character of these investment trusts. An iconic part of Scotland’s financial services heritage would no longer be administered from Midlothian, but Manhattan, and short-term profit would be prioritised over long-term, sustainable gain.

Many of these trusts have a large proportion of retail shareholders, who tend to be less engaged when it comes to the management of their holdings and often don’t exercise their voting rights. But indications from the first vote to take place suggest that shareholders are alive to the threat and are engaging more than they have ever done. If this trend continues in the other votes next month, that is not only a positive thing for an iconic and important part of Scotland’s economy but may set a precedent for shareholder engagement in the future.

The turnout from retail shareholders – and the decisive result of the first vote - will allay some concerns in the industry, but investors shouldn’t be complacent in the face of the ongoing threat.

President Trump may not be able to intervene in such matters directly, even if he wished to do so, but shareholders can make their voice heard when the issue comes to a head early next month – as a clear majority did in the first such vote earlier this week in relation to Herald Investment Trust. By doing so, they would be not only helping head off the immediate threat to individual trusts, but protecting a long-standing and key part of Scotland’s financial services sector.