DWS Strategic Income Trust Targeted by Activist

May. 5.10 | About: DWS Strategic (KST)

The DWS Strategic Income Trust (NYSE:KST) along with several other DWS closed-end funds have become a target of closed-end fund activist Western Investment. The Fund seeks high current income through investment in lower rated corporate, emerging market and US Government issued fixed income securities.

Western Investment is sending a special GOLD proxy card to KST shareholders asking them to elect Arthur Lipson (who runs Western Investment) to the KST board to serve as a Class II Trustee of the Fund until the 2013 annual meeting of shareholders thereby withholding votes from all of management’s nominees.

Some of the arguments in the Western Investment filing are summarized below:

  • We have lost all confidence in Deutsche and the Board of Trustees and believe that they are unfit to manage closed-end funds.
  • 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 Fund has a history of disregarding best practice corporate governance recommendations which is indicative of a board that does not place shareholders’ interests first.
  • Western Investment believes the current independent members of the Board, who receive compensation from service on 126 funds, may be too beholden to the Fund’s investment manager. Consider- the incumbent trustees’ lucrative arrangement whereby they each collect at least $240,000 each in annual fees in the aggregate for their service on 126 Deutsche fund boards. We believe they could become far too beholden to the investment manager to take decisive action that benefits shareholders if it would negatively affect the fees collected by the Fund’s investment manager.

In the proxy statement, Western Investment reported ownership of a fairly modest 10,900 shares. The largest shareholder is Wells Fargo with 234,865 shares or about a 5% ownership stake.

KST is currently selling at a discount to NAV of -6.75% which is below the 52 week average discount of -11.74%. If the discount were to widen to 10% or more, KST would be an attractive purchase because of the activist involvement.

Ticker: KST DWS Strategic Income pays monthly

  • Total Assets: 92.5 MM
  • Total Common Assets: 62.8 MM
  • Annual Distribution Rate: 8.67%
  • Income Only Yld: 9.26%
  • Modified Duration: 3.56 years
  • Fund Expense ratio: 1.40%
  • Discount to NAV:-6.75%
  • Portfolio Turnover rate: 115%
  • Effective Leverage: 32.9%

Full Disclosure: Long a small “starter” position in KST.