(Bloomberg) — A few days ago, BlackRock Inc. sent an unusual message to thousands of customers. It contained none of the boilerplate language or arcane fine print that is often packed into these types of statements. No, this was a declaration of war.
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“Your Fund is Under Attack,” the headline screamed in bold letters.
The attackers: Sharp-elbowed Wall Streeters who say they need to eliminate price distortions in funds run by Boaz Weinstein, BlackRock and others that have defrauded investors of billions of dollars. Fund manager. This has become something of a crusade for Weinstein. Last month, his hedge fund, Saba Capital Management, launched a frenzied bid for investors to remove Mr. BlackRock as manager of six funds that manage about $10 billion in assets.
This prompted a memo that BlackRock sent to clients. “If Saba is successful, they may seek to appoint themselves as investment advisors” and fundamentally disrupt the fund's purpose and strategy, “all to enrich themselves.”
The ongoing conflict has turned the $250 billion closed-end fund industry, a usually sleepy backwater of Wall Street, into the stage for one of the most dramatic power struggles in the financial world, with shareholder returns next month. It will culminate in the General Assembly.
Weinstein said BlackRock is not only locking shareholders into an underperforming product, but also failing to meet basic governance standards by thwarting efforts to elect new directors. BlackRock cited Mr. Weinstein's own track record as taking over a closed-end fund that previously invested in variable-rate loans and putting some of that money into crypto exposure and SPACs.
Both pledge to stand on the moral high ground.
“We need to show that there is a price to pay for illegally establishing a position to protect management fees while doing terrible things to shareholders,” Weinstein said in an interview. He added that many had a track record of “terrible performance”.
Mr. Weinstein's move reflects some of the most audacious corporate raids of the 1980s and is the latest in a multiyear campaign targeting closed-end funds that trade well below the value of their underlying assets. It's an escalation.
The 50-year-old hedge fund boss currently has about $6 billion invested in the product, using his stake in dozens of funds to persuade asset managers to buy back shares close to their market capitalization ( (known as a bid) or pressuring the funds to go to the fund. Similar results can be obtained with open-end vehicles.
In recent years, he has acquired Eaton Vance, Franklin Templeton and Voya Financial, persuaded management teams to accept bids, won board seats and even resigned as a fund advisor. I urged them to do so.
Weinstein points out that even if Saba wins the proxy fight, it doesn't necessarily mean the hedge fund will take over management of the fund. That will be up to the board, but Saba has said it is “ready” to help and may offer the job.
In mid-2021, Saba will take over the $600 million Voya Prime Rate Trust, currently known as Saba Capital Income and Opportunity Fund (ticker BRW), changing its investment mandate after obtaining shareholder approval. did. After the two tender offers, the fund returned an annualized 4.1%, more than triple the high-yield benchmark, according to data compiled by Bloomberg. According to Morningstar data comparing the product with U.S. bank-financed closed-end funds, the product will rank 3rd out of 22 peer funds in 2022, 14th in 2023, and 2nd from the bottom through April of this year. Ranked No.
By comparison, the $1.6 billion BlackRock Innovation & Growth Term Trust (ticker BIGZ) is down 23% annually over the same period, while the $1.7 billion BlackRock ESG Capital Allocation Term Trust (ticker ECAT) has increased at an annualized rate of 0.8% since September. The beginning of 2021. BIGZ ranked him 1st or 2nd in a Morningstar category consisting of just two funds during the period. ECAT was ranked 6th in the group of 11 funds in 2022, 2nd in 2023, and 8th until April this year.
BlackRock also noted that BIGZ and ECAT returned 19% and 32%, respectively, last year during a broad market recovery, and that the firm manages closed-end funds in the same Morningstar peer group as BRW, and that Saba He was quick to point out that the company had a higher return than the previous one. Funds in recent years.
Still, BIGZ and ECAT continue to trade well below their so-called net asset values (NAVs). BIGZ is currently trading at a 17% discount, while ECAT is trading at a 10% discount, according to data compiled by Bloomberg. Saba's BRW is at his 8.3% discount.
BlackRock has warned investors that if Saba were to take control, it could fundamentally change the structure of the fund and expose shareholders to greater risk. After acquiring BRW, Saba began adding everything from crypto exposure to SPACs to other closed-end funds that Weinstein has campaigned against. BlackRock said Mr. Saba's tactics had nothing to do with helping investors other than himself and his hedge fund clients.
“Saba's real goal is prompt payments and, more recently, revenue in the form of management fees,” a BlackRock spokesperson said in an email.
“Hot Hand”
Mr. Weinstein launched three proxy campaigns against the wealth management giant last year for a board seat, but was unable to win any.
Far from backing down, Mr. Weinstein is going even further this year. In addition to his efforts to terminate BlackRock's fund management contracts, he is also seeking to overhaul the boards of BlackRock's 10 funds.
Saba nominated potential board members, including a former Deutsche Bank derivatives executive and Alexander Vindman, a retired U.S. Army lieutenant colonel who testified against former President Donald Trump during impeachment proceedings.
“Saba has been growing his assets and is enthusiastic, having launched numerous successful campaigns in the closed-end fund space in recent years,” said Eric Hertzfeld, president of Thomas J. Hertzfeld Advisors. said. Herzfeld manages investment products that buy closed-end funds. “BlackRock has the ability to counter Saba's advances given its depth and knowledge.”
Mr. Weinstein said he was redoubling his efforts, arguing in part that big asset managers were undermining shareholders' ability to receive fair evaluations at annual meetings.
Last year, he won a lawsuit against BlackRock and other fund managers for implementing so-called controlling stake clauses that could thwart proxy attacks.
BlackRock has appealed the ruling and is currently defending a separate lawsuit from Sabah. Mr. Weinstein's company sued BlackRock in federal court in New York in March, arguing that ECAT's “enhancement ordinance” “deprives shareholders of any realistic prospect” of electing a trustee other than the incumbent. . “All shares of ECAT have identical voting rights,” BlackRock's lawyers said in a court filing.
“BlackRock has behaved far worse than any other executive, and a stock bid alone is not enough,” Weinstein said. “They have put themselves in a position where they need a strong response, not only to improve their performance, but also as a signal to the industry that shareholders are no longer willing to stand up.”
“Saba uses the veil of governance to force changes that enrich itself at the expense of long-term shareholders, thereby undermining the investment objectives of closed-end funds,” said Stephen Minnaar, managing director of closed-end funds at BlackRock. “This is confusing the strategy.” ”
He notes that BlackRock has sought to increase shareholder returns and reduce costs in recent years. Since 2016, the company has repurchased $1.3 billion in closed-end fund shares, including about $180 million in BIGZ stock, and launched new funds without the load fees that were typically charged.
BlackRock announced Friday that a series of closed-end funds, including BIGZ and ECAT, will buy back some of their own shares at a slight discount to the value of the underlying assets if the funds are trading above $1. He announced that he plans to make a proposal. 7.5% discount for enough time.
“We believe the actions announced today will increase total returns while preserving the benefits of a closed-end fund structure, allowing all fund shareholders to achieve their financial goals,” a BlackRock spokesperson said in a statement. Ta.
proxy war
As voting begins ahead of shareholder meetings in June, both BlackRock and Saba are actively trying to connect investors to their causes.
BlackRock sent white proxy cards to individuals and paid advisory firm Georgeson about $1.7 million to help solicit votes for six funds, according to regulatory filings. Saba ships gold proxy cards.
The hedge fund has launched a website to keep shareholders updated on the campaign. At the top it says “Fink about it,” a nod to BlackRock CEO Larry Fink. Saba announced that it will host a webinar on May 20 to discuss its plans to “hold BlackRock accountable.”
“I'm not just fighting for these funds, I'm fighting to make sure the next 30 funds don't copy these shady tactics,” Weinstein said. “Larry Fink doesn't need to apologize to BlackRock's shareholders for his actions, but they should be embarrassed.”
—With assistance from Dan Wilchins, Adam Kommel, and Denise Cochran.
(Updated with BlackRock announcement regarding potential fund share repurchases in fifth and sixth penultimate paragraphs)
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