Edinburgh Worldwide needs to be more self-reliant

According to Terry Tanaka, the new board of Edinburgh Worldwide Investment Trust ought to reject an unwise proposal from activist investor Saba Capital

At the Edinburgh Worldwide (LSE: EWI) annual meeting at the end of April, Saba Capital finally succeeded in removing the trust's directors and installing their own candidates in their place. The board was unable to secure a high enough turnout from the remaining shareholders to win, despite the US activist's 30 percent stake in EWI and the backing of a few other significant investors.

An unwise plan to combine Edinburgh Worldwide with its sister trust, Baillie Gifford US Growth (LSE: USA), in which Saba is a 29 percent shareholder, was rejected by Saba. More significantly, it was incensed that in October, just before the rocket and satellite company's valuation doubled to £800 billion, EWI reduced its ownership of SpaceX by 35%. Saba insisted on knowing if Baillie Gifford or the board made this decision.

For Edinburgh Worldwide, the answer is clear.

Edinburgh Worldwide's "historic significant portfolio activity and related decision-making processes" will now be reviewed, according to the new board. However, the solution seems clear. While Scottish Mortgage (LSE: SMT) did not reduce its holdings, two other trusts under Baillie Gifford's management, USA and Schiehallion (LSE: MNTN), did. Everyone would have sold equally if Baillie Gifford had made the decision. The directors of Edinburgh Worldwide most likely felt that their stake in SpaceX was too big and requested to sell. At that point, Baillie Gifford would have given other trusts the chance to cut back. While some did, others didn't.

A more astute board would have sought Baillie Gifford's advice, heeded it, and sold either nothing or very little. The directors were duly removed for that error. But it would be a grave error to fire Baillie Gifford, who initially purchased the stake and were unwilling sellers of any of it.

Edinburgh Worldwide's stock has increased by 70% over the past year. The discount to net asset value (NAV) is now only 1%. The NAV return has been 60%, which is significantly higher than market indices and is quickly making up for previous years' poor performance. It's highly likely that strong performance will continue.

Saba's suggested substitute approach is illogical. In order to invest in other investment trusts that are trading at significant discounts to NAV, it wishes to assume management duties and use Edinburgh Worldwide. The issue is that, on average, discounts have dropped to single digits, and they are lower for trusts that own quoted stocks. Higher discounts are still available for trusts with excessive gearing, illiquid assets, or a controlling shareholder. Activist campaigns against these trusts are not a simple way to make money. Saba made a wise investment in the industry, but the chance is now gone and won't be back for a long time.

What is Edinburgh Worldwide going to do next?

What will the new directors do, then? The message is unclear. "Continue to work closely with Baillie Gifford regarding the company's holding in SpaceX and potential future liquidity initiatives," according to the statement. They pledge to make a tender offer following SpaceX's IPO. This is superfluous given how close the shares are to NAV. In any event, "working closely with Baillie Gifford" means keeping it as manager for the time being since Edinburgh Worldwide will be locked into its SpaceX holding for six months following the IPO.

They suggest selecting new directors, which will be challenging in the absence of a clear manager and plan. Renewing the contract with Baillie Gifford and allowing it to continue with the work it was doing fairly well is undoubtedly the best course of action.

Saba's activist campaign would be totally useless as a result. Saba may decide to call another extraordinary general meeting in order to try to replace the recently appointed directors. However, it's more likely that Saba would simply walk away after selling its stake for a sizable profit. Hopefully, the new board will demonstrate that it is genuinely independent of Saba.