Masters in Business: At the Money Special - Activist Investing for NAV

Host: Barry Ritholtz
Guest: Boaz Weinstein, Founder and CEO of Saba Capital
Release Date: March 26, 2025

Introduction

In this special edition of "At the Money" from Masters in Business, host Barry Ritholtz engages in a deep and insightful conversation with Boaz Weinstein, the visionary behind Saba Capital. This episode delves into the intricate world of activist investing, particularly focusing on Closed End Funds (CEFs) and their discounts to Net Asset Value (NAV). Boaz shares his unique approach to identifying market inefficiencies and leveraging them to generate substantial returns for his investors.

Understanding Closed End Funds and NAV Discounts

Boaz Weinstein begins by explaining the fundamental nature of Closed End Funds (CEFs), comparing them to ETFs and mutual funds. Unlike ETFs, which are redeemable and typically trade close to their NAV, CEFs can trade at significant discounts or premiums based purely on market supply and demand.

[03:16] Boaz Weinstein:
“When the NAV is at a big discount, it isn't necessarily an opportunity, Barry, because it can stay at that discount for a decade... What we've done is we've come in with an institutional grade offering... and we bought $7 billion of closed end funds.”

Weinstein emphasizes that identifying and acting on these mispricings requires a strategic and activist approach, which distinguishes his firm from passive investment strategies.

Saba Capital's Activist Strategy

Saba Capital's strategy revolves around purchasing substantial positions in CEFs trading at double-digit discounts to NAV. By owning significant stakes, Saba gains the leverage needed to influence management decisions aimed at narrowing these discounts.

[07:30] Boaz Weinstein:
“ETFs are redeemable. Mutual funds, the manager has to sell and give you NAV back... So if you think about it, we're not talking about small potatoes. 86 to 100, by the way, is more than 14%.”

As Saba's investments grow from $2 billion to $7 billion, their influence on fund management increases, making it more likely for companies to take proactive steps to return NAV to investors, such as tender offers or buybacks.

Growth and Impact of Saba Capital

Over time, Saba Capital has transformed from managing $2 billion to an impressive $7 billion in CEFs, becoming the world's largest owner of these funds. This growth has empowered Saba to effectively push for changes within the funds they invest in.

[08:57] Boaz Weinstein:
“We have four [state pensions] in the last two years. It allows us to get bigger, faster, stronger... management is very worried that we'll be able to cause the fund to liquidate and they would lose 100%.”

This expansion has not only increased their voting power but also enhanced their ability to negotiate favorable terms for investors.

Saba Capital vs. Competitors

Boaz highlights the stark contrast between Saba Capital and other products in the market. While many competitors yield around 4% returns, Saba consistently delivers approximately 12%, showcasing the effectiveness of their activist approach.

[12:27] Boaz Weinstein:
“If you buy a closed end fund at minus 14 and a year later it's still at minus 14... you've paid the manager their fee, you've also charged your investor the fee... you're not delivering alpha.”

This superior performance is attributed to Saba's active involvement in narrowing discounts, rather than merely holding and expecting the market to correct itself.

Challenges of Activist Investing

Activist investing is fraught with challenges, including entrenched management, legal hurdles, and the inherent resistance to change within established funds. Boaz recounts instances where legal action was necessary to ensure voting rights and influence over fund management.

[21:50] Boaz Weinstein:
“Every share gets to vote... the lobbying industry for the industry got in state law something that says... they limited our vote... we went to court... and we won.”

These battles underscore the persistence and commitment required to effect meaningful change in the CEF space.

Case Studies: UK Investment Trusts

Boaz discusses specific cases within the UK market, where Saba Capital has successfully influenced management to offer shareholders the option to exit at NAV. This proactive stance has led to significant value realization for investors.

[14:09] Boaz Weinstein:
“We're now in negotiations with them. But just to say, because what are we talking about is £13 billion in the UK market... We're talking about real, real money.”

By acquiring substantial stakes, Saba compels fund managers to address persistent discounts, benefiting both institutional and retail investors.

Launch of Saba's ETF: CEFS

Building on their success with CEFs, Saba Capital launched an Exchange-Traded Fund (ETF) named CEFS. This ETF mirrors Saba's strategy by focusing on CEFs trading at significant discounts, providing investors with a more accessible avenue to benefit from their activist approach.

[44:37] Barry Ritholtz:
“...you get to participate in the same strategy, only in an ETF, not a hedge fund.”

The CEFS ETF has amassed over $200 million in assets, offering investors exposure to a diversified portfolio of CEFs with the potential for higher returns compared to traditional investment products.

Future Outlook and Sustainability

Boaz remains optimistic about the sustainability of his strategy, despite the challenges. He acknowledges that while Saba may not "put themselves out of business" by eliminating discounts, the persistent inefficiencies in the market ensure ongoing opportunities for activist investors.

[32:19] Boaz Weinstein:
“If the market sells off, I'm not going to be able to keep it from selling off in my names either... there is some alchemy in finance.”

He believes that as long as discounts exist and management remains resistant to change, there will be a continued need for activist interventions to unlock value for shareholders.

Conclusion

Boaz Weinstein's journey with Saba Capital offers a compelling case study in activist investing within the Closed End Fund sector. By identifying and addressing market inefficiencies, Saba Capital not only generates substantial returns for its investors but also contributes to greater market efficiency. This episode underscores the importance of proactive investment strategies and the significant impact dedicated activists can have on the financial landscape.

Notable Quotes:

• Boaz Weinstein at [03:16]:
  “When the NAV is at a big discount, it isn't necessarily an opportunity... What we've done is we've come in with an institutional grade offering... and we bought $7 billion of closed end funds.”

• Boaz Weinstein at [07:30]:
  “ETFs are redeemable. Mutual funds, the manager has to sell and give you NAV back... So if you think about it, we're not talking about small potatoes. 86 to 100, by the way, is more than 14%.”

• Boaz Weinstein at [12:27]:
  “If you buy a closed end fund at minus 14 and a year later it's still at minus 14... you've paid the manager their fee, you've also charged your investor the fee... you're not delivering alpha.”

• Boaz Weinstein at [21:50]:
  “Every share gets to vote... the lobbying industry for the industry got in state law something that says... they limited our vote... we went to court... and we won.”

• Boaz Weinstein at [32:19]:
  “If the market sells off, I'm not going to be able to keep it from selling off in my names either... there is some alchemy in finance.”

This episode of At the Money provides invaluable insights into the mechanics of activist investing and the potential it holds for discerning investors. Boaz Weinstein's expertise and strategic acumen offer a blueprint for navigating and capitalizing on market inefficiencies within the Closed End Fund sector.