Boaz Weinstein, founder and chief investment officer of Saba Capital Management, during the Bloomberg Invest event in New York, United States, Wednesday, June 7, 2023.
Jeenah Moon | Bloomberg | Getty Images
Boaz Weinstein, the hedge fund investor on the winning side of JPMorgan Chase 6.2 billion dollars, the trading loss of “London Whale” in 2011, now attacks the index fund giant black rock.
On Friday, Weinstein’s Saba Capital detailed in a presentation seen by CNBC its plans to promote change in 10 closed-end BlackRock funds that trade at a significant discount to the value of their underlying assets compared to their peers . Saba claims the underperformance is a direct result of BlackRock’s management.
The hedge fund wants to control the board of directors of three BlackRock funds and a minority slate of seven others. It is also seeking to oust BlackRock as manager of six of those ten funds.
“Over the last three years, nine of the ten funds we’re talking about have lost money for investors,” Weinstein said on CNBC’s “Squawk Box” earlier this week.
At the heart of Saba’s “Hey BlackRock” campaign is a debate around governance. Saba claims in its presentation that BlackRock manages these closed-end funds in the “exact opposite” way it expects companies to do.
BlackRock is “speaking out of both sides of its mouth” in doing this, Saba says. This cost retail investors $1.4 billion in rebates, according to Saba calculations, on top of the management fees charged.
BlackRock, Saba says in the document, “considers itself a leader in governance, but crushes shareholder rights.” In some BlackRock funds, for example, if an investor does not vote at a general meeting, their shares will automatically go to support BlackRock. Saba is suing to change that.
A BlackRock spokesperson called the claim “highly misleading” and said these funds “simply require that most shareholders vote affirmatively in favor.”
The index fund manager’s rebuttal, “Defend Your Fund,” describes Saba as an activist hedge fund looking to “get rich.”
The problem and the solution
Closed-end funds have a limited number of shares. Investors who want to sell their positions must find an interested buyer, which means they may not be able to sell at a price that reflects the value of a fund’s holdings.
In open-ended funds, on the other hand, an investor can buy back their shares from the manager in exchange for cash. This is how many index funds, like those that track the S&P 500, are structured.
Saba says he has a solution. BlackRock should buy back investors’ shares at what they are worth, not at what they are currently trading at.
“Investors who want to get out do so, and those who want to stay will stay for a hundred years if they want to,” Weinstein told CNBC earlier this week.
Weinstein, who founded Saba in 2009, made his fortune two years later when he noticed that a relatively obscure index of credit derivatives was behaving abnormally. Saba began buying back the underlying derivatives that, unbeknownst to him, were being sold by JPMorgan’s Bruno Iksil. For a time, Saba suffered huge losses on this position, until Iksil’s bet backfired, costing JPMorgan billions and generating huge profits for Saba.
Saba said in his investor presentation that changes at BlackRock could take the form of a tender offer or restructuring. The presentation noted that BlackRock had previously initiated its bidding with another closed-end fund where an activist was pushing for a similar change.
For funds that perform poorly relative to their peer group, Saba seeks shareholder approval to fire the manager. In total, BlackRock is seeking new management at six funds, including BlackRock California Municipal Income Trust (BFZ), BlackRock Innovation and Growth Term Trust (BIGZ), and BlackRock Health Sciences Term Trust (BMEZ).
“BlackRock fails as a manager by underperforming relevant benchmarks and having worst-in-class corporate governance,” the document said.
If Saba gains shareholder approval to fire BlackRock as manager of the six funds, the newly formed boards would then begin a review process lasting at least six months. Saba says that in addition to providing investors with liquidity, board candidates would push for fee reductions and other unspecified governance fixes.
A BlackRock spokesperson told CNBC that the company has always taken steps to improve closed-end fund returns when necessary.
“BlackRock closed-end funds welcome constructive engagement with thoughtful shareholders who act in good faith with the common goal of improving long-term value for all,” the spokesperson said.
Weinstein said Saba has run similar campaigns at about 60 closed-end funds over the past decade, but has only taken over management of a fund twice. The hedge fund sued BlackRock last year to remove this so-called “disenfranchisement provision” on certain funds and filed another lawsuit earlier this year.
BlackRock presented its shareholders via mailings and advertisements. “Your reliable and profitable investment,” BlackRock told investors, is threatened by Saba.
Saba plans to hold a webinar for shareholders on Monday, but says BlackRock has refused to provide the list of shareholders of several funds. BlackRock spokesperson said it had “always acted in accordance with all applicable laws” when providing shareholder information, and that it “never blocked Saba’s access to shareholders” .
“What we want is for the shareholders, of which we are the largest but by no means the majority, to earn this $1.4 billion, which can be done with the press of a button,” said Weinstein on CNBC earlier this week.
WATCH: CNBC’s full interview with Saba Capital’s Boaz Weinstein
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