Boaz Weinstein, the founder and chief investment officer of Saba Capital Management, a New York hedge fund, has initiated a battle against BlackRock, the largest asset manager globally, concerning a collection of closed-end mutual funds in which his firm has invested.
Through a series of tweets and filings submitted to the Securities and Exchange Commission (SEC) in the previous month, Weinstein has raised allegations against BlackRock, claiming corporate governance deficiencies and subpar portfolio management. He has asserted that the asset manager attempted to prevent external entities, including Saba Capital, from securing board positions in certain funds and implementing necessary modifications.
Saba Capital Management holds shares in three closed-end funds managed by BlackRock, namely the BlackRock Innovation and Growth Term Trust (BIGZ), BlackRock Capital Allocation Term Trust (BCAT), and BlackRock ESG Capital Allocation Term Trust (ECAT). Weinstein is actively pushing for a conversion of these funds into open-end funds, allowing Saba to sell its shares and generate a profit. This strategy is commonly employed in closed-end fund arbitrage, wherein an investor aims to capitalize on the disparity between a fund’s market value and its net asset value (NAV).
What Does the Term “Closed-end Fund” Mean
A closed-end fund is a type of mutual fund that initially releases a fixed number of shares through a single initial public offering (IPO). Once the IPO is complete, no additional shares are created, and as a result, no new capital is infused into the fund. On the other hand, an open-ended fund, such as most exchange-traded funds (ETFs) and mutual funds, continuously issues new shares and may repurchase its own shares upon request.
The closed-end fund structure offers several advantages, including more predictable management fees and the ability for investors to access a focused portfolio that aligns with their specific investment objectives. Closed-end funds are commonly found in the form of municipal bond funds and some global investment funds.
Similar to an ETF, a closed-end fund holds a portfolio of securities and is listed on stock exchanges. Its market price can trade at a premium or a discount in relation to its net asset value (NAV), depending on market demand. When a closed-end fund experiences a significant discount, activist shareholders such as hedge funds may become involved, aiming to purchase stakes in the fund at a discounted price and subsequently sell them at NAV.
Weinstein’s objective at Saba Capital’s invested funds, BCAT and ECAT managed by BlackRock, is to bring about changes in their fund structure by advocating for new board members. These appointed board members would have the authority to influence the desired modifications. In preparation for the annual shareholder meetings scheduled for July 10, Saba Capital sought access to the shareholder lists of the two funds to engage in vote solicitation. However, Weinstein claimed that BlackRock deliberately impeded this process.
Tweet and Controversy Surrounding BlackRock’s Actions
In a tweet on July 11, Weinstein stated, “BlackRock rejected our request, and used the list for their own solicitation. The result? Neither fund reached a quorum, and both meetings were adjourned. This is not how nearly every manager has behaved in the same situation.”
According to Weinstein, Saba Capital has invested in numerous closed-end funds, with approximately 46 percent of the firm’s flagship fund allocated to such funds. Weinstein highlighted this during his participation in the Bloomberg Invest conference held in New York recently.
During the event, Weinstein expressed his concerns regarding BlackRock’s actions, stating, “What they are doing to entrench with respect to stripping shareholder rights, banning shareholder proposals which they’ve done, puts them at the G side of governance as the worst company in the S&P 500.”
In response to these allegations, BlackRock released a statement last month suggesting that Saba’s true interest lies in pursuing short-term profits rather than focusing on governance issues. The statement argued, “Its playbook involves disrupting the investment objectives and strategies of closed-end funds by seeking to force tender offers, open-endings, or liquidations to enrich itself at the expense of other shareholders.”