It was my pleasure to moderate the “Closed-End Fund Activism” panel January 22 in New York at the Fourth Annual Activist Investment conference. The panelists were Andrew Dakos from Bulldog Investors and Art Lipson of Western Investment, both very well known in the world of closed-end fund activism. We were joined by Warren Antler, from AST Fund Solutions as Art was running late and we welcomed his addition as an expert in CEF activism from the proxy solicitation perspective.

Closed-end fund activism is similar to regular corporate activism except it is typically focused solely on both the short and long-term ways to close a significant discount to net asset value (NAV). This is usually done through tender offers, share buy-backs, management changes, adding or removing members of the board of directors, open-ending, or liquidation of the fund at NAV. The goal of the activist investor is to make the extra alpha gained from the narrowing of the discount or shares tendered close to NAV.

Our Panelists:

Andrew Dakos joined Bulldog in 1999 and co-manages the firm’s investment strategy. He has serves as a director for The Mexico Equity & Income Fund. He serves as a Principal of Brooklyn Capital Management, a Registered Investment Adviser and is President of Special Opportunities Fund (SPE).

Art Lipson is the Managing Director of Western Investments. He managed the fixed-income research departments at various Wall Street firms. He created the Lehman Brothers Bond indicies in 1973 and retired from Wall Street in 1985.

Warren Antler is Vice President, CEF Specialist at AST Fund Solutions. He has distributed a monthly dissident tracking and corporate action report on CEFs since 2003.


JCS:  Good afternoon. I have some prepared questions. We also have planned plenty of time for your questions. Do you want to start Warren?

Warren Antler:  In 2012 we've had a record amount of fund merges. A lot of those merges were encouraged by activists getting in the fund, and volunteering to merge into a similar fund, a pretty cool idea. Other than that, the discounts are shrinking. Andy and Art are having a hard time finding targets.

Andy Dakos: We advise several private partnerships. My partners, Phil Goldstein and Steve Samuels, founded what ultimately became Bulldog Investors about 20 years ago. The objective of our firm is to identify mispriced assets, under-valued sectors. We're typically looking for a security trading at a discount to intrinsic value, and then being active in trying to eliminate or at least narrow that discount. We ran about 40 campaigns over the last 15 years. The majority of those were in closed-end funds.

JCS: I'd like to start with a question about closed-end funds being well known for yield and discounts. Is there a discount or distribution yield, range that you search for when deciding how easy it will be to use your activist strategies on closed-end funds?

Andy Dakos:  There's certainly a discount level that we look at and where we start to get interested. That's not always an absolute number; it's in the context of other things, asset class, size of the fund, liquidity of the fund. Probably most important, other than the discount itself, is the shareholder base, who else owns the fund. To the extent that obviously the institutional shareholders may hold a large position in a particular closed-end fund. They're more likely to vote for somebody that's coming in and looking to see a narrowing discount vs. the typical individual investor.  

There's only a couple of lead activists in closed-end funds. There are a number of, I'll call them, passive investors or activist followers. Plus with rates so low, investors are reaching for yield in the CEF space. I don't know when, but I believe something will happen; municipal rates falling or a credit crisis relapse. Something is going to happen in the market that will lead to selling and wider discounts, certainly premiums will go away.

As for the distribution rate, we're not interested in what the distribution components will be, whether it's ordinary income, return of capital, or some combination. That's not what drives our thesis, in terms of investing and building a position in closed-end funds. It's really just about the discount.

Art Lipson: With CEFs bond funds, you can create a higher yield in the fixed-income fund than you can get in a regular open-end mutual fund. It's not so obvious that you're going to get better performance from an equity fund that's closed-end than an open-end equity fund because of leverage, just more volatility. Most of the opportunities come from the equity fund area where we are often looking at funds with a lower average payout rate.

JCS: And this has come up since Friday (Jan 18), but Alpine has two funds (Tickers: AOD and AGD), that cut their dividends by 50%; one that was trading previously at about a 10% premium and one at a mild discount. It's been a pretty rough day for the funds this morning. When funds cut their dividend’s dramatically is this a situation where an activist investor would look into buying shares? (AOD) has an intra-day discount around 16% presently.

Art Lipson: Western reached an agreement with Alpine a year ago, not to attack any of their funds and to always vote with the board. So, we would not be involved in such a situation, but I could imagine other activists would be consider the fund at those discount levels.

JCS: So anybody in the room interested? It may be worth looking at today or tomorrow.

Andy Dakos:  In the situation where you have a discount outlier, whatever is causing the outside discount. A discount that wide sticks out like a sore thumb.

JCS: Let's shift to some of your own activist experiences. Could you share with the group a Board war story?   

Art Lipson: It is our belief that if a fund trades at deep discount to NAV it is a supply and demand issue. Too much supply leads to inadequate  demand and wider discounts.

I’ll contrast the situation, first talking about how one board did a good job, and then I'll get into how one did a bad job. With Alpine we arranged a tender for 20% of their shares at 5% discount to NAV. We were a very large holder, as was Bulldog. We signed an agreement with Alpine without filing a 13D notice. We let them know that if they reduced the discount on this fund, we won't be involved with any of your other funds. So that was a case of management acting productively before it came to a proxy situation.

But last year, we were also involved in a situation on the other side, and this was a fund that was run by Guggenheim. It was a fund half tax-exempt and half equities. They have a staggered board plus have a majority requirement that 50% of all shareholders would have to vote to replace directors. In 2011, we got more votes than their director; however, we didn’t get 51% of all votes, so their director was held over. They just steadfastly refused to negotiate and reach any reasonable resolution terms. The first contest was in July in 2011, and the second contest should have been a year later in 2012. They didn't have a contest at all in 2012.  The fund went from approximately $300 million in assets to $80 million in assets because they wouldn't work with activists. I think it was arrogance on their part. . That's a 75% drop in assets and revenue because they refused to negotiate.  We waited out the fund, showing fund managements that we will stick out hard fights. It shows that if a fund doesn’t want to negotiate, they can basically be put out of business.

Andy Dakos:  I'm just going to give one example of what did not work, and then I'll give you an example of what I think is good.  We haven’t run a proxy contest that went to a meeting since summer of 2009.  We were in the midst of a proxy contest with a municipal bond fund.  We had built our position at a high teen discount previously. We gave notice to the fund and the board said the notice was not proper. Ultimately, we didn’t run the contest that year. It was not a staggered board; the whole board was up for vote. During that time, there certainly could have been an opportunity to sell and close out our position.  

We determined at that time to continue to pursue a proxy contest, to get control of the board. Although we lost a lot of votes at that meeting, we did prevail. We ended up taking over the board. We conducted a large tender offer that took out all the shareholders that participated at 99.5% of NAV. The shareholders then approved a change in the mandate of the fund.  After the tender offer the fund shrank from $290 million in assets, down to about $92 or $94 million. I think that from the big picture standpoint, I think that was a seminal event for us. It really showed us what we may be able to accomplish. We haven’t had to run a proxy contest since then, I don’t think that is a coincidence.  We can generate some return for our investors, the fund can go on. Here is an example on how you can lose the entire fund. This has increased our credibility for what we can accomplish in future contests.