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Boaz Weinstein claims that BlackRock funds are ‘suppressing shareholder rights’.

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The controversy surrounding BlackRock funds

Boaz Weinstein, founder and chief investment officer of Saba Capital Management, has stirred up a storm by accusing BlackRock, one of the largest index fund managers, of suppressing shareholder rights. This accusation comes after Weinstein’s success in the aftermath of JPMorgan Chase’s $6.2 billion trading loss in 2011, known as the “London Whale” incident. Now, Weinstein’s focus is on addressing what he sees as governance issues within BlackRock-managed funds.

In a recent presentation by Saba Capital, Weinstein outlined plans to advocate for changes in 10 closed-end BlackRock funds that exhibit significant underperformance compared to their peers. Saba alleges that this underperformance directly stems from BlackRock’s management practices, prompting the hedge fund to seek board control in three funds and a minority slate in seven others. Additionally, Saba aims to remove BlackRock as the manager of six of these funds, citing poor financial outcomes for investors.

At the core of Saba’s campaign, labeled “Hey BlackRock,” is a critique of BlackRock’s governance approach within these closed-end funds. Saba claims that BlackRock’s management contradicts its public image as a leader in governance, resulting in financial losses and limitations to shareholder rights. For instance, Saba is challenging the automatic allocation of non-voted shares to support BlackRock, arguing that this practice diminishes shareholder autonomy.

In response, BlackRock has defended its position, refuting Saba’s accusations as “misleading” and asserting that their policies aim to uphold shareholder interests. The index fund manager has characterized Saba as an activist hedge fund seeking self-enrichment through its campaign against BlackRock.

Proposed solutions and the way forward

A central point of contention lies in the structure of closed-end funds, which have a fixed number of shares and limited liquidity for investors seeking to divest their holdings. Saba’s proposed solution to address this liquidity challenge involves BlackRock repurchasing shares from investors at their true value rather than current market prices, ensuring fair treatment for shareholders.

Weinstein, drawing on his past successes and financial acumen, suggests that such a strategy would provide investors with the option to exit their positions at a fair price while offering long-term stability for those choosing to remain invested. By advocating for changes in fund management and governance, Saba aims to enhance returns for investors and promote a more transparent and equitable environment within these BlackRock funds.

If Saba secures shareholder approval to replace BlackRock as the manager in the targeted funds, Weinstein’s team plans to initiate a thorough review process led by newly appointed boards. This process would prioritize investor liquidity, reduced fees, and other governance improvements to align the funds’ performance with industry benchmarks and ensure long-term value creation.

Despite BlackRock’s assertion that it has historically taken corrective measures to improve fund performance when necessary, the standoff between Saba and BlackRock underscores broader challenges surrounding shareholder activism and corporate governance in the financial sector. The outcome of this clash will not only impact the involved parties but also shed light on the evolving landscape of investor rights and fund management practices in the industry.

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