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Activist hedge fund manager Boaz Weinstein has suffered multiple setbacks in his bid to take control of a series of BlackRock closed-end funds, as shareholders rejected his director nominees and voted to retain the fund’s manager.
Weinstein’s Saba Capital this spring put forward candidates to join the boards of 10 closed-end funds managed by BlackRock, with a combined market value of about $10 billion. They argued that they had underperformed peers and that managers had failed to close the gap between the prices of the funds and the value of the underlying assets. Saba also sought to terminate BlackRock’s management contracts with six of them.
But BlackRock announced Friday that shareholders of eight of the funds had retained BlackRock directors and that five termination attempts had failed. Two funds have postponed their voting deadlines until July 16 to try to reach a quorum.
Weinstein has led an aggressive campaign against BlackRock management as part of a broader attack on the $250 billion closed-end fund industry. Closed-end funds issue a fixed number of publicly traded shares and use investor capital to purchase assets.
Unlike traditional mutual funds, they do not allow investors to redeem against the fund’s net asset value. That means discrepancies can arise between the share price and the value of the underlying assets. New York-based Saba has invested $5.8 billion in 200 closed-end funds and often forces managers to narrow valuation gaps by buying back shares or converting funds to an open-end structure that allows redemptions.
Saba and Weinstein did not immediately respond to requests for comment.
Promoters of closed-end funds argue that the structure allows them to invest with a long-term perspective and put money into illiquid assets without worrying that quick redemptions could force a sell-off. They argue that the funds are vulnerable to activists seeking quick wins at the expense of long-term gains.
Glenn Hubbard, chairman of the board of directors of the BlackRock funds, said: “For the second year in a row, Saba has failed to convince shareholders that Saba will deliver more value than the funds’ current management teams .”
“These proxy campaigns have shown how vulnerable closed-end funds are to a single, vocal, wealthy activist, whose views on the funds’ strategies and governance do not reflect those of other shareholders and their investment objectives,” he added.
BlackRock said that across all funds, less than 11 percent of outstanding shares voted with Saba in favor of the nominees or to terminate the management contract.
Saba had said in investor presentations that BlackRock managers had “failed to deliver long-term outperformance” and pointed to her track record of working with boards of other funds to reduce valuation gaps or switch to open-ended funds.
BlackRock countered by pointing to Saba’s record at two closed-end funds it acquired from Voya and Franklin Templeton. According to BlackRock’s presentation, management fees rose at each fund and the funds continued to trade at a larger discount than their peers, as measured by Morningstar.
In the fight, BlackRock took advantage of fund bylaws that require new nominees to fund boards to get approval from a majority of all shareholders, not just those who vote. Saba challenged this in court. Proxy advisor Institutional Shareholder Services has advised shareholders to reject the termination requests, but to support some of Saba’s nominees.
Weinstein has also purchased stakes in U.K. mutual funds, a type of investment vehicle structured as a publicly traded company, with similar characteristics to U.S. closed-end funds.