As evidenced by my last article, I was neither surprised by the massive dividend cuts at Total Dynamic Dividend Fund (AOD) and Alpine Global Dynamic Dividend Fund (AGD), nor surprised by the relative strength in Alpine Global Premier Properties Fund (AWP) in Friday’s aftermath. Goals of research include the most thoroughly constructed expectations possible, and consistently assessing relevance as facts develop. Research is not power. I did not cause Alpine to cut AOD and AGD’s distributions. I cannot even cause Alpine to answer my questions on their quarterly Closed-End Conference call.
The only thing I control is the extent to which I exercise objectivity. My perspective on any security is capable of change as the present changes. In the last week ,AOD’s monthly distributions have been reduced from 12 cents to 5 ½ cents and it market valuation has gone from a 30%+ premium to a single digit discount. In the last week AOD’s monthly distributions have been reduced from 12 cents to 5 ½ cents and it market valuation has gone from a 30%+ premium to a single digit discount. Similar changes at AGD were of lesser magnitude. This piece shares my personal current perspective on Alpine’s Funds, in arrears of last week’s company announcement and price change.
I continue to believe AOD to be dangerous, even at a discount to its Net Asset Value (“NAV”) and I believe the best prospects at current prices among Alpine Funds lies in AWP.
I do hope for the benefit of holders of AOD’s nearly 220 million shares and AGD’s nearly 25 million shares that each find long term liquidity somewhere around NAV. Hope is not synonymous with objective belief and my own disclosures appear in this piece’s final paragraph.
Relevant Views on the Closed-End Fund Instrument
Closed-End Funds trade on supply and demand. Many Closed-End Funds trade at a discount to their Net Asset Values (“NAV”). A prolonged discount in any Closed-End Fund may demonstrate the grouping of underlying securities to be worth less to investors because of the wrapper holding them. I am not a premium fund basher. While I very rarely have ever purchased funds at a premium, I also believe a Closed-End Fund can and should add value, such to justify a premium. In my view, markets can be tremendously inefficient in the short term.
The challenge is in evaluating the wrapper represented by each Closed End Fund. At a simple level, one must ascertain whether a Fund exists for the purpose of maximizing shareholder value, or to pay captive investors’ Assets Under Management Fees (“AUM”) to the advisor. I am but one observer and my own opinion about any fund if perceived should never be taken as fact.
Inefficiencies may afford alternate types of opportunities to funds of any purpose. I generally look for one of two things for traditional long positions. I want to invest in Closed-End Funds whose actions will demonstrate a purpose of maximize shareholder value and do so. I also want to invest in Closed-End Funds whose exhibited purpose has been so despicable that the shareholder base will unlock value itself.
Looking to Alpine's Power
Alpine will define its Funds’ purpose through actions. Only Alpine can create or destroy value in its funds. If the Funds exist for the purpose of maximizing shareholder value, the potential supply overhang represented by AOD ‘s nearly 220 million outstanding shares will be irrelevant. If Alpine has no desire to hold its shareholders captive while earning AUM fees from the fund, they can announce a tender offer for the Fund Company to buy back shares at NAV, or a minor discount. Of course, there are various reasons (merited or otherwise) that are cited by potentially captive Funds for not doing so.
When a Closed-End Fund trades at a premium, observers may assume its purpose to be pro-shareholder. When premiums (whether manufactured or otherwise) evaporate, I believe we discover a Fund’s purpose by its choice whether to restore value or hold shareholders captive.
The forward looking relevance of Alpine's historical behavior may be first demonstrated by the actions that have been or will be taken by Alpine on its funds which have already has been trading at a harsh discount for some time.
Varied Risk and Reward among Alpine Closed-Ends
Alpine’s use (or lack thereof) of its value-unlocking power at AWP may be indicative of how wide a discount Alpine would allow to grow in AOD, and how long Alpine will allow such a discount to persist and worsen. I have believed and continue to believe that Alpine has had the ability create value for AWP shareholders to such an extent that AWP would trade at a premium.
Feel free to critique my theory on why AWP trades at a discount. NAV performance has been good among peers. I believe the problem has been distribution changes and I have been unable to recently get an explanation as to what the current policy is, why, or when it changed. On September 2nd 2008 AWP declared monthly distributions of 12.67 cents, 15.7% annualized of its then current $9.69 NAV. The annual report cites the December 22nd 2008 declaration with the text:
(W)e reduced the monthly dividend from 12.67¢ per share to 3¢ with the caveat that when the market maelstrom moderates, we would look to adjust the dividend levels if conditions warrant.
That distribution annualized at 7.7% of then current 4.68 NAV. As a percentage of NAV, One might have taken this to be the bottom in percentage of NAV terms considering AWPs dividend capture rotation strategy by prospectus.
On January 12th 2010 AWP declared its distribution at 3.3 cents monthly, only 5.2% of its then current $7.60 NAV. In effect, the Funds change again reduced the distribution in NAV terms, which in my opinion is most relevant for a Dividend Capture Fund.
In the effort to maintain focus on objective market relevance I am not going to assess prospective motivations for the pattern. What I will discuss is my opinion as to the comparative prospects among the funds.
If Alpine’s funds exist for shareholder value and are not Instruments of Asset Manager Captivity, the fund trading at the largest discount is the immediate candidate for a tender offer. That is AWP, but should Alpine conduct a tender it may also suggest a floor discount for the other funds.
I also believe AWP has the ability to increase its distributions meaningfully, if desirable to its stewards . Its strategy by prospectus includes:
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.
Only a month ago, Alpine was declaring a annualized 26.6% NAV distribution on another of its Dividend Capture Funds. Shall there not be a selection bias in the utilization if Dividend Capture we could see ramping up on AWP, or further ramping down of AOD and AGD.
If Alpine’s Funds prove demonstrative of Captivity, AWP is the most likely to be the first target of value-restoring shareholder activism given an already sustained discount. Sadly, if Alpine does prove to be a Closed-End Fund manager demonstrative of Asset Captivity the nearly 220 million outstanding shares of AOD are a tremendous supply-side risk. There would be little demand near NAV for 220 million shares of a Captively Managed Closed-End Fund whose distribution tax characteristics also dissuade taxable investors. Should Alpine prove demonstrative of Captivity, a prolonged 30%+ discount would not surprise me.
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.
If my perception of a securities prospect changes, so too will my positions. Based on alternate observations at alternate times I have on occasion acted first on long and later on short theses in the same security. I have not traded in any Alpine securities since my last article. I may take some or all the profits in my AOD short and/or add to my short position on a bounce. Long positions I take or add to in the near term are highly unlikely to be AOD. If I ever take a long position in AOD I will immediately document it here.
Disclosure: Long AWP, Short AOD