Boaz Weinstein loves pipelines.
Or at least the Saba Capital Management CEO is bullish enough to have launched a campaign for board seats late last month at three Franklin Templeton closed-end funds that invest in pipelines and other energy infrastructure.
The three funds were part of Franklin’s July 2020 purchase of Legg Mason: ClearBridge MLP & Midstream Total Return Fund, in which Saba recently held a 10.05 percent stake; Energy Midstream Opportunity Fund (a 13.04 percent stake); and MLP & Midstream Fund (a 5.07 percent stake).
All told, Saba’s recent unhedged bets on the funds total more than $98 million.
The ClearBridge funds, which have about $1.1 billion in assets under management, recently traded at discounts to their net asset values of between 15.24 percent and 17.23 percent, according to Morningstar. Saba wants to shrink those — and book a profit in the process.
“Their discounts are among the largest in the closed-end fund market,” said Saba partner Paul Kazarian, who heads up Saba’s closed-end fund portfolio, in a telephone interview.
The three funds charge adjusted expense ratios ranging from 2.75 percent to 3.03 percent. And they have lagged their benchmark index for the past three, five, and ten years for the periods ending October 31, according to Morningstar.
“When you think about that over the life of the fund, those are awful numbers,” said Kazarian.
A Franklin Templeton spokesperson declined to comment for this article.
Saba, which has a total of $4.8 billion in assets, has a track record as a closed-end fund activist — often to the dismay of big fund companies that manage them. Its modus operandum is often to push for fund management to enact tactics aimed to reduce or eliminate the discounts and so enrich shareholders. That may mean buying back the fund’s shares via tender offers, merging the fund with a similar open end mutual fund, or simply liquidating the fund altogether.
Weinstein’s firm manages the publicly-traded $89.8 million Saba Closed-End Funds ETF, which buys big positions in closed-end funds that trade at wide discounts to their NAVs.
Saba holds stakes in more than a dozen closed-end energy-related funds, including several overseen by Tortoise Capital Advisors, Voya Financial, Cushing Asset Management, Neuberger Berman, and New York Life Investments. Energy infrastructure and related funds have been trading at exceptionally wide discounts to net asset value in recent years despite recently surging oil prices.
Discounts widened to 30 percent or more in the sector in 2020 as retail investors, who often dominate closed-end fund market prices, fled the volatile funds in a panic.
The outsized impact on discounts may be on account of the large number of similar MLP-focused funds, according to Phillip Goldstein of Bulldog Investors, which invests in closed-end funds. “It’s supply and demand,” he says. “I speculate that there are too many of them.”
Boaz Weinstein and his Saba colleagues don’t really need to scrounge for discounts among closed-end funds to turn a profit this year. The Saba Master Fund has returned 25 percent year to date through October, according to a person familiar with the fund. The HFRI Fund Weighted Composite has lost 4.45 percent during that span.
Among other trades, the Saba fund has written credit default swaps, a form of insurance, on the bonds issued by relatively solid companies likes Walt Disney, PepsiCo, and McDonald’s while buying swaps on cyclical and volatile credits, according to the source.
Saba has also had some recent successes in its campaigns against closed-end fund management in the energy sector. After seeking representation on the board of the Center Coast Brookfield MLP & Energy Infrastructure Fund, in which it recently held a 24.45 percent stake, Saba agreed in August to withdraw its nominees, according to a Securities and Exchange Commission filing — a sign that the two sides are working on an accommodation to reduce the discount.
Kazarian didn’t elaborate on the matter. A spokesperson for the Center Coast Brookfield fund did not respond to a request for comment by press time.
Saba also targeted the Salient Midstream & MLP Fund, which Salient Capital Advisors merged last month into an open-end mutual fund with a similar focus called the Salient MLP & Energy Infrastructure Fund, eliminating the discount.
Pushing for a merger with an existing open end mutual fund is often a relatively amicable solution to a closed-end fund proxy fight because it allows for the advisor to retain assets while eliminating the discount to satisfy activists. In this case, Saba is likely aware that Franklin Templeton also advises the open end ClearBridge Global Infrastructure Income Fund, which is heavily invested in energy pipelines.
This is not the only time Saba has crossed swords with Franklin Templeton over a closed-end fund. Saba recently held a 36.77 percent stake in the $432.5 million Templeton Global Income Fund and is seeking control of its board in a long-running proxy battle that Franklin is challenging in court. Among possible options, Saba seeks to have the fund consider merging with another, more popular closed-end fund.