Swiss Helvetia CEF Confronts Shareholder Democracy (Part 1)

Includes: EWL, SWZ
by: Gwailo

From the land of evil clowns and cuckoo clocks:

Shareholders in the Swiss Helvetia closed-end fund (NYSE:SWZ) should be on the lookout for the proxy packets they will get for the Fund's annual meeting on June 16. SWZ's performance last year fell far short of its benchmarks: while iShares Switzerland (NYSEARCA:EWL) was up 15.5%, SWZ's total return at net asset value was a -5.0% loss -- on top of a 28.2% loss in 2008. The latest Annual Report explained, in a delicately diplomatic way, that SWZ's manager/adviser/sponsor, the Hottinger Capital Company:

[D]id not time precisely the beginning of the market turnaround and given the Fund’s significant defensive posture, was not able to increase materially the Fund’s market exposure before the market had already seen significant appreciation.

SWZ shares have traded at a large and persistent discount to net asset value, which ranged from -11.5% to -19% last year and averaged -15.1% for the last three years. The current discount of -13.8% means that Mr. Market values SWZ's 32 million shares ($10.20 per share as of 5/28/10) as being worth $52 million less than the underlying portfolio assets -- a $52 million deadweight loss for investors. This may be a matter of concern for the large institutional investors that together own 35.6% of the fund, especially 1607 Capital Partners (a hedge fund holding 4,184,036 shares as of 3/31/10) and the "Discounted Assets" portfolios at Lazard Asset Management (3,689,835 shares as of 3/31/10) which emphasize adding "alpha" by reducing discounts.

The results of last year's annual meeting indicate a growing displeasure: the unopposed incumbent directors gathered only 19.3 million votes (including broker "non-votes") from the 32+ million shares outstanding. 8 million shares voted for "Withhold", and a Board-sponsored proposal to permit SWZ to buy various derivatives failed to get the support needed to pass. (N-CSR 9/4/09).

An individual investor, Mr. Walter S. Baer of Los Angeles, brought the matter to a head when he submitted a proposal under SEC Proxy Rule 14a-8 for a shareholder vote at this year's June 16th meeting:

RESOLVED, The shareholders of The Swiss Helvetia Fund, Inc. ask the Board of Directors to take the steps necessary to adopt an interval fund structure, whereby the Fund will conduct periodic tender offers at least semiannually for at least 10% of currently outstanding common shares at a price of at least 98% of net asset value (NAV).

SWZ's lawyers responded with a barrage of objections, and asked the Investment Management Division of the SEC for permission to omit the proposal from the proxy statement entirely. However, the SEC staff recently came out with a flat rejection of this attempt to quash the shareholder franchise. Both Barron's (5/22/10 p. 35) and Ignites! (the Financial Times' mutual fund reporter, 5/26/10) have noted the outcome as evidence of the SEC's heightened emphasis on shareholder access to proxy ballots.

These "No Action Letter" materials, including Fund Counsel's 36 page bleat to the Investment Management staff, are now available online. These documents, especially the minutes of the SWZ Board of Directors meeting that supposedly "considered" and rejected Mr. Baer's proposal, give us a rare peek at the realities of investment company governance. (pp. 35-39) There has been much academic theorizing about conflicts in fund governance: How can shareholders/"principals" monitor the incentives and acts of their managers/"agents"? Do nominally "independent" fund directors in fact act like watchdogs or lapdogs?

Let's see (in Part 2) what we can learn from a glimpse into SWZ's boardroom.

Disclosure: Author holds a long position in SWZ