Boaz Weinstein’s campaign to seize BlackRock funds falls short

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Activist hedge fund manager Boaz Weinstein has suffered multiple setbacks in his effort to take charge of a series of BlackRock closed-end funds, as shareholders rejected his director nominees and voted to retain the funds’ manager.

Weinstein’s Saba Capital put forward candidates this spring to join the boards of 10 closed-end funds managed by BlackRock, with a combined market value of about $10bn, arguing they had underperformed competitors and managers failed to close the gap between the funds’ prices and the value of its underlying assets. Saba also sought to terminate BlackRock’s management contract at six of them.

But BlackRock on Friday announced that shareholders at eight of the funds had retained the BlackRock directors and five termination attempts had failed. Two funds have delayed their voting deadline to July 16 to try to reach a quorum.

Weinstein has led an aggressive campaign against BlackRock’s management as part of a broader assault on the $250bn closed-end fund industry. Closed-end funds issue a fixed number of publicly traded shares and use investor capital to buy assets.

Unlike traditional mutual funds, they do not allow investors to redeem at the funds’ net asset values. That means discrepancies can open up between the share price and the value of the underlying assets. New York-based Saba has $5.8bn invested in 200 closed-end funds and often pushes managers to shrink 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 the structure allows them to make investments with a longer term perspective and put money into illiquid assets, without having to worry that rapid redemptions could force a fire sale. They contend the funds are vulnerable to activists who seek quick profits at the expense of long-term gains.

Glenn Hubbard, chair of the BlackRock funds’ board, said: “For the second year in a row, Saba has failed to convince shareholders that Saba will deliver more value than the funds’ current stewardship and management teams.”

“These proxy campaigns have illustrated just how vulnerable closed-end funds are to a single, vocal, deep-pocketed activist, whose point of view on the funds’ strategies and governance does not align with other shareholders and their investment objectives,” he added.

BlackRock said that at all of the funds, fewer than 11 per cent of the shares outstanding voted with Saba for its nominees or for termination of the management contract.

Saba had claimed in investor presentations that BlackRock managers had “proven incapable of delivering long-term outperformance” and it pointed to its record of working with boards at other funds to reduce valuation gaps or convert to open-ended funds.

BlackRock countered by pointing to Saba’s record at two closed-end funds that it had taken over from Voya and Franklin Templeton. According to BlackRock’s presentation, management fees at each fund rose, and the funds continued to trade at a bigger discount than their peers, as measured by Morningstar.

In the battle, BlackRock benefited from fund bylaws that require new nominees to fund boards to gain approval from the majority of all shareholders, not just those who vote. Saba has challenged these in court. Proxy adviser Institutional Shareholder Services recommended shareholders reject the termination requests but support some of Saba’s nominees.

Weinstein has also bought up stakes in UK investment trusts, a type of investing vehicle which is structured as a public company, with similar features to US closed-end funds.

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