Saba ETF raises uncomfortable questions for the future of trusts

Activist ETFs and the future of the investment trust sector

The launch of the Saba Capital Investment Trusts UCITS ETF marks a new phase in the long-running tension between activist capital and the UK investment trust sector. At first glance, the strategy appears straightforward: buy investment trusts trading at a discount to net asset value (NAV) and push for actions that close that discount. But behind this apparently simple trade sits a deeper challenge to the culture, governance and purpose of investment trusts.

For more than a century, the investment trust model has been built around a distinctive principle: permanent capital deployed for long-term investment. Independent boards oversee the vehicle on behalf of shareholders, allowing managers to invest in assets that require patience and stability - from smaller companies to infrastructure and private markets.

Activist strategies operate on a very different time horizon.

Saba’s approach is essentially to treat discounts as an arbitrage opportunity. If a trust trades at a 15% discount to the value of its assets, an activist investor can buy shares and push for measures such as aggressive buybacks, mergers or even liquidation. If the discount narrows, the activist captures the gain.

In isolation, that trade may appear harmless. In aggregate, however, the emergence of a scalable ETF designed to exploit investment trust discounts raises uncomfortable questions about the future of the sector.

A strategy built on structural pressure

Discounts exist in investment trusts for many reasons. Some reflect market sentiment or asset class cycles. Others arise because trusts hold illiquid assets that cannot easily be realised at NAV on demand.

But the existence of a discount does not necessarily mean a trust is broken.

Indeed, the closed-ended structure of investment trusts - unlike open-ended funds - allows managers to take long-term positions without worrying about redemptions. That stability has historically been a strength, particularly in less liquid markets.

Activist investors view the same feature differently. To them, a discount is simply a price anomaly to be monetised.

The Saba ETF attempts to scale this approach. Instead of pursuing individual campaigns, the vehicle allows investors to gain exposure to a portfolio of discounted trusts while benefiting from Saba’s activist engagement across the sector.

In effect, it converts governance pressure into a packaged investment strategy.

Why this matters for the sector

The concern for investment trust boards is not simply that activists exist - activism has always been part of capital markets. The concern is that a product designed explicitly to target the sector could change incentives across the ecosystem.

If activist capital becomes a structural feature of the market, boards may face pressure to prioritise short-term discount management over long-term investment outcomes.

That shift could have several consequences.

First, trusts investing in illiquid assets may find it harder to maintain the stable capital base that makes those strategies viable. Infrastructure, venture capital and private equity vehicles depend on patient capital. Forced liquidity events risk undermining that model.

Second, persistent activism could discourage boards from supporting innovative or specialist mandates. Strategies that require time to mature may be particularly vulnerable to pressure from investors seeking rapid discount closure.

Third, the broader perception of the sector could change. Investment trusts have historically appealed to investors looking for long-term exposure to differentiated assets. If the narrative shifts toward activist arbitrage, that identity may be diluted.

The limits of the strategy

There are also practical reasons why the Saba ETF may struggle to achieve scale.

Liquidity is the most obvious constraint. Many investment trusts - particularly those outside the largest vehicles - have relatively modest trading volumes. Building meaningful positions across the sector may prove difficult without influencing prices.

The opportunity itself may also be self-limiting. If activism successfully pushes boards to adopt more proactive discount control mechanisms, such as regular buybacks or periodic continuation votes, the scope for arbitrage may diminish.

Ironically, the more pressure activists apply, the faster the opportunity they seek to exploit may disappear.

Governance dynamics may present another obstacle. Investment trust shareholders are often highly engaged and supportive of existing boards. Recent activist campaigns have shown that investors are willing to defend governance structures they believe protect long-term value.

If shareholders view activist strategies as destabilising rather than constructive, support may be limited.

What investors actually want

Perhaps the most important question is what investors ultimately expect from investment trusts.

While discounts attract attention, they are not the only measure of success. Many investors choose investment trusts precisely because they offer exposure to assets and strategies that cannot easily be accessed elsewhere.

In that context, a narrow focus on discount arbitrage risks missing the broader purpose of the structure.

For boards, the challenge is therefore not simply to resist activism, but to ensure that governance and communication remain strong enough to retain investor confidence. Transparent discount policies, clear strategic mandates and consistent engagement with shareholders can help address concerns before activists attempt to exploit them.

A moment of reflection

The arrival of the Saba ETF should not be dismissed as a passing curiosity. It reflects a wider trend in global markets: the increasing financialisation of governance and the search for new forms of tradable alpha.

But it also offers the investment trust sector an opportunity to reaffirm its strengths.

The model has survived for more than 150 years because it provides something rare in modern markets: stable capital aligned with long-term investment horizons.

If boards continue to demonstrate that this structure delivers value for investors, the appeal of short-term activist strategies may ultimately prove limited.

The real question is not whether activists will challenge the sector. They will.

The question is whether the investment trust model can continue to prove that long-term stewardship remains worth defending.