Shareholders of Alpine Total Dynamic Dividend Fund (AOD) may soon get crushed by a falling house of cards. Sadly, there are nearly 220 million shares in public hands and while some may understand the danger in owning a Closed-End Fund trading 31.45% above its Net Asset Value, few if any are cognizant that collapse may be imminent.
AOD’s Financial Engineering Game
The primary cause of AOD’s inflated market price is its yield, regardless as to whether shareholders understand the engineering behind it. Problem is that its reign of being the selectively favored sibling among Alpine Funds appears poised to come to an end.
Alpine has three Closed-End Funds, each by prospectus using a Dividend Capture Strategy. The strategy is disclosed, regardless as to whether shareholders understand it. The strategy is disclosed even in its lowest yielding Dividend Capture Strategy Fund (AWP) prospectus, as follows:
ii. (M)aximize the amount of the Fund’s current income through dividend capture rotation trading and by buying and holding income-producing securities....In addition, the Fund intends to pursue dividend capture trade rotation of all such securities.
Dividend capture rotation entails buying securities before they trade ex-dividend, then selling once the security trades ex-dividend. If the markets for those securities are efficient, the price at which securities are bought and sold reflect the value of the dividend. Whether any intrinsic value is achieved by the strategy is the subject of debate.
What is clear is the relationship between the Closed End Fund’s yield, enabled by the Capture Strategy and each Closed-End Fund’s Market Value. AOD’s most recently distribution declaration amounted to 26.6% annualized on then current NAV ($5.40). AWP most recently declared 5.9% annualized on its NAV. While Alpine has refused my requests for a measure of Dividend Capture Velocity, it appears AOD has been using its shared strategy at 450% the pace of AWP.
Alpine’s selective use of its strategy is strongly related to the market prices of each fund. AOD’s market price is 131.45% of its $5.66 NAV. AWP’s market price is 81.50% of its $7.19 NAV. Thus the selective use of the strategy has contributed to a 161.29% relative valuation multiple. To classify the results of such selectivity as uncommon is an understatement in my view. Worse, I believe shareholders fail to understand the risks inherent in Alpine’s selectivity .
Alpine has disclosed receiving a Wells Notice from the Securities and Exchange Commission
primarily relating to the historical investment in and allocations of shares of initial public offerings and primarily involving the failure to approve, review, and adequately implement certain written policies and procedures to adequately prevent violations of the Federal securities laws including, undisclosed conflicts of interest, material misstatements or omissions of information in certain disclosure documents of Alpine Series Trust and books and recordkeeping inadequacies relating to such investments and allocations.
I am not stating that anything illegal has occurred at Alpine. But, owning AOD, or to a lesser extent AGD as an investment may be riskier than gambling at roulette, particularly now. In my humble opinion, the broader relevance is the market inefficiency caused by an apparent selection bias at Alpine Woods. The COO, Arleen Baez and Alpine Woods’ Senior Managing Director Marc Rappaport have for the last couple of months avoided my inquiries on the topic. In my experience, such avoidance is indicative of much to hide.
Just how bad is selectivity at Alpine? There is publicly available documentation that Alpine relationship managers are assigned to its double-dip clients (Fund investors who are also paying institutional clients of Alpine Woods Capital Investors),
providing an avenue for regular dialogue and enhanced personalized service in addition to customary reporting.
What to Expect
The purpose of this piece is not to demonstrate whether these are good or bad people at Alpine Woods. Rather, I am documenting my call that AOD will fall like a house of cards in the very near future. Regardless as to whether Alpine Woods is willing to reveal a measure of velocity for Capture Trading at AOD, the 450% relative NAV-yield demonstrates selectivity and AOD’s capture velocity lacking sustainability.
In late May, AOD and Alpine Global Dynamic Dividend Fund’s (AGD) Board of Trustees made similar announcements:
Given the heightened concerns about global market volatility, with particular focus on European instability, AOD will declare one month of dividend distribution at a time for the near term. This reflects recent pressure upon the Fund’s substantial European holdings in view of the year-to-date decline of 24% in the EURO STOXX 50 Index, adjusted for U.S. dollars. Europe continues to be the largest source of dividend opportunities for the Fund.
I have seen announcements believed to be of similar purpose at other Closed-End Funds before drastic negative changes to distributions. In my view, the legal risk (to the advisor and Trustees) of dramatically slashing their distributions and watching shareholders’ market value move from premiums to a discount is likely mitigated by the release. I think it's likely that distribution cut announcements at AOD and AGD will come this month, and make reference to a large overseas oil company which recently halted its dividend.
Regardless as to when the cuts come, I expect that the market effects will be most detrimental to AOD. AOD’s cut is likely to be more significant than AGD based on what appears a higher magnitude of unsustainable capture velocity. More importantly, there are nearly 220 Million shares of AOD and in contrast only about a tenth as many AGD shares. Once the selectivity and manipulative engineering cease, I expect about 50% downside at AOD.
Inefficiencies in Closed-End Funds
It is my view that Closed-End Funds are an instrument of tremendous utility to investors, but that to effectively use the instrument one needs to be smart within this arena. Only “Mr. Market” determines over time whether such is true, and whether any of us are smart. I am short AOD and long AWP including accounts from which I license portfolio and trading data to Covestor Ltd. (“Covestor”) a Registered Investment Advisor. Although not presently, I have at times been short AGD as well.
AOD and its engineering have been used (or abused) like a drug by yield-hungry advisors and investors, no doubt. It has never been among my taxable income holdings and i's high velocity capture more than eliminated it from contemplation among those tax advantaged income ideas I have used ahead of the year end expiration of Bush's tax cuts.
Disclosure: Short AOD, Long AWP. No other positions