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Why is Saba Capital Buying Up Templeton Global Income?

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GuruFocus.com
·3 min read
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- By Praveen Chawla

Gurufocus insider data shows that Saba Capital Management LP, a hedge fund well known for its sophisticated credit strategies and closed-end fund expertise, is buying the Templeton closed-end bond fund, Templeton Global Income Fund (NYSE:GIM).


The Templeton Global Income Fund is managed by Michael J. Hastentab, Ph.D. It seeks high current income, with a secondary goal of capital appreciation. Under normal market conditions, the fund invests at least 80% of its net assets in income-producing securities, including debt securities of U.S. and foreign issuers and emerging markets. Currently, it is 90% invested in fixed income securities with 10% in cash. The average weighted maturity of its portfolio is 2.29 years and yield-to-maturity is 1.77%. The fund is currently selling at around an 8% discount to NAV.

Why is Saba Capital Buying Up Templeton Global Income?
Why is Saba Capital Buying Up Templeton Global Income?

Saba Capital Management is a hedge fund founded in 2009 by Boaz Weinstein, who was previously co-head of the Global Credit Trading business at Deutsche Bank (XTER:DBK), where he co-managed a team of approximately 650 people and is best known for being on the forefront of utilizing certain credit relative value and capital structure trading strategies. At Saba, Weinstein leads a team of 35 professionals, and the senior investment team has worked together for fifteen years. One of Saba's areas of special expertise is the analysis of closed-end funds and engineering strategies for arbitraging and closing the discount between NAV and market prices. I

Saba also operates an ETF, the Saba Closed-End Funds ETF (CEFS), which specializes in Closed-End Fund arbitrage.

The following chart from Morningstar compares Saba's closed-end funds (CEFs) with the S&P 500 as well as with Templeton's CEFs. Saba's CEFs are up over 30% since inception, which is exceptional for a fund that is mainly invested in fixed income closed-end funds.

Why is Saba Capital Buying Up Templeton Global Income?
Why is Saba Capital Buying Up Templeton Global Income?

Saba now owns over 21 million shares of the Templeton Global Income Fund, which is over a 15% ownership stake. Saba has built up this position rapidly in the last two quarters. I think Saba is likely attracted to the fund because it has a high-quality portfolio of bonds, and yet is trading at a discount to NAV. Saba's modus operandi is to buy enough of the fund to get on the board of directors and then use activist strategies (which may also include litigation) to close the discount gap.

Why is Saba Capital Buying Up Templeton Global Income?
Why is Saba Capital Buying Up Templeton Global Income?

Looking at the chart above, we see that the Templeton Global Income Fund was trading at a premium to NAV prior to 2013 but flipped to a discount in a later period. Saba appears to be betting that it can get the fund to close the gap from price to NAV. Given the 8% or so discount and another 3.48% forward distribution yield the fund offers, the payoff is very attractive in this low yield bond world where the two-year treasury is yielding 0.13%, if Saba is able to close the discount gap. Recently, Saba did just that with other funds when it persuaded Western Asset Funds to close the discount gap of their funds via a tender offer.

Why is Saba Capital Buying Up Templeton Global Income?
Why is Saba Capital Buying Up Templeton Global Income?

Conclusion

Reviewing insider data to monitor the activities of sophisticated parties can generate interesting investing ideas. In this case, it appears that the hedge fund Saba has identified the Templeton Global Income Fund as a target in which the gap between NAV and price is unwarranted and can be closed. Given Saba's past record, I think there is a good likelihood that it will be successful.

Disclosure: The author owns shares of Templeton Global Income Fund.

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This article first appeared on GuruFocus.