The DWS Dreman Value Income Edge Fund (DHG) has become a target of several closed-end fund activists. Unlike traditional pure trading arbitrage, an activist arbitrageur does not simply wait for closed-end fund discount convergence, but instead takes action to open-end the target fund or force the fund to actively take steps to narrow the discount.
DHG has just released its next proxy statement and two closed-end fund activists (Western Investment and Benchmark Plus Management) have filed a stockholder proposal requesting that the DHG Board take steps to declassify the Board so that all directors are elected on an annual basis. The activists also want to present an alternative list of Board members to replace the existing Board.
Some of the arguments in the activists filing are summarized below:
- We believe the Fund has had a significant and persistent discount to NAV because the market has lost faith in the Board.
- The Fund’s investment manager and its affiliates have a troubled history of receiving SEC censures, being sued by shareholders and taking actions adverse to fund shareholders.
- The Board has a history of disregarding best practice corporate governance recommendations — indicative of a board that does not place shareholders’ interests first. The Fund shares its Board of Directors with 125 other funds in the Deutsche Asset Management fund complex..
- The Fund’s NAV discount is unacceptable
- The Board has failed to take adequate action to reduce the Fund’s NAV discount
- The Fund’s performance has been abysmal
- We do not believe DB America, or any other Deutsche Asset Management affiliate should be associated with the Fund or any other closed-end fund.
Western Investment owns about 2.4 million shares of DHG. Benchmark Plus Management owns 256,500 shares and has steadily been adding to their position. Their April fund purchases are listed here:
- April 1: 13,600 shares
- April 5: 900 shares
- April 6: 3,400 shares
- April 7: 28,000 shares
- April 8: 9,900 shares
The DHG discount to NAV is currently -11.5% which is below the 52 week average of -18.44%. But I believe that the activist involvement may drive the discount even lower over the next few months. Even if the activist proposal is defeated, it is quite possible the DHG Board will be much more active in the future with share repurchases and may authorize a voluntary tender offer to help shrink the discount further.
Full Disclosure: Long DHG. I plan to vote in favor of the activist proposal.