In the last nine weeks, I covered why Greater China Fund's (GCH) proposed New Advisory Agreement proposal could not pass without a liquidity event, and the collective conditions which made a merger into The JF China Region Fund (JFC) less likely than a GCH-independent liquidity event. This week we learned that critical mass liquidity will be made available to all desiring shareholders as a condition for approving the same Advisory Agreement at a rescheduled vote on January 8th.
Mr. Market revalued GCH Tuesday as now appearing as an arbitrage trade, up 4% with China (FXI), Hong Kong (EWH) and Taiwan (EWT) all lower alongside our domestic market. The relative valuation change appears highly sensible. GCH is now readily perceived as an arbitrage opportunity.
Advisor Approval and Tender or Liquidation
The City of London ("COL") proxy is to mirror-vote (same proportion for/against) other shareholders, more or less assuring the fund's liquidity or liquidation. Greater than 75% participation in a 70% tender would trigger the Board's support for liquidation. So the least beneficial outcome for the planned liquidity event occurs if 75% (but not more) of shares are tendered. 75% of shares tendering would subject the company to buy back the minimal 93.3% of tendered shares at 99% of NAV.
Prior to the liquidity event broadly anticipated to make it smaller, GCH will likely be a popular swap idea by opportunistic traders and advisors who alternately hold ETFs or even CEFs where timely discount narrowing is highly improbable like China Fund, Inc (CHN). With close to $500 million in assets, GCH shares are reasonably easy for pros to buy/sell for tax planning or arbitrage alpha in the interim.
… and Later
A smaller GCH managed by Aberdeen may a year from now trade at a discount or premium. Aberdeen is very highly thought of in the Closed End Fund ("CEF") Community for management and service. Aberdeen's Asia Pacific Income (FAX), Australia Equity (IAF), and Global Income (FCO) closed Monday at a premium while its Indonesia Fund (IF), Asia Tigers Fund (GRR), and India Fund (IFN) were discounted. With GCH, supply and demand are being recalibrated through a tender to hit the reset button on GCH.
So what are the takeaways for interested observers in the Closed End Fund Space?
Everyone is screaming "Thank You" to City of London. The firm's clients and GCH's other shareholders would turn back their calendars a week to mention City of London at their Thanksgiving dinners if they could.
COL manages tax exempt capital for foundations, endowments, and pension plans in the Emerging, Developed and Frontier market segments. Because of their size, COLs clients need scale and few advisors hired by such clients are so resolved and purposeful to produce relevant alpha.
The large scale liquidity event in GCH was enabled by the high governance standards to which COL held GCH. It applies the same governance standards to the entire Closed End Fund space. Earlier this week one of COL's London-listed holdings JPMorgan Asia Investment Trust announced preliminary results of a tender. City of London is an advocate for good common sense governance, worldwide.
Other Closed End Funds' Boards would be wise to observe and heed the progress COL may advocate for. COL is clearly no pushover having fulfilled a series of unique obstacles to hold the GCH Board to high governance standards. GCH's last corporate action (20% tender offer) was broadly perceived in the CEF space as being a typical minimalist action in effort to reduce COL's voting power. COL shocked everybody with its resolved response. The CEF space rarely sees standing-ovation moments like COL's public announcement that it would not tender. COL visibly demonstrated tremendous resolve to serve shareholder value in greater scale, and increased its voting power in the process. Dominoes fell. GCH's prior advisor was terminated by the subsequent shareholder vote, leaving the GCH board to (eventually) earn shareholder support for a new Advisor, liquidate, or be acquired.
What to make of the Folks at GCH?
Aberdeen as a new advisor has never been the issue.
In the end, GCH's Board did task itself with creating massive value for its shareholders. Massive share supply/demand recalibration and liquidity promises to serve all GCH shareholders, in equal proportion.
In the months leading up to Monday night's announcement, a significant progressive shift in the Fund Company's culture has been apparent. While COL (despite having no process control) may have once appeared GCH's only apparent proponent for good governance, the Fund's chairman can today present a somewhat progressive fund. However tardy, GCH's Board has resolved to serve its most important stakeholder (the shareholder) in a major way. While their stewards may not exchange Christmas cards next month, COL and GCH created one of the best possible resolutions for GCH shareholders in my view.
Complacency continues to prevail in many Closed End Funds' Board Rooms. Without leaving the Emerging Market segment, one can readily notice that Templeton Dragon Fund (TDF) trades at a double digit and persistent discount. When shareholders (including COL) bought a Templeton Fund should they have presumed they would need an instigator to provoke stewards to serve shareholder value? Sadly, Closed End Funds' Boards are often tardy. When so, it ultimately decreases their Assets Under Management ("AUM") rather dramatically.
Additional disclosure: I am also short CHN. These positions are in Covestor.com model accounts, based on my trading activities.