The recent inquiry and writing from a Dow Jones reporter whom I respect has inspired me to share a more detailed perspective of the Korea Equity Fund (KEF). My original assessment of KEF, upon adding it to my account licensed to Covestor’s Well Intentioned Activism Profile Closed-End Funds model, was of course cognizant of perpetual headline risk. Headline risk is inseparable from any investment, especially those with direct exposure to Korea. Murray Coleman presented this observation exceptionally well in the context of regional economic expectations, which I will not repeat.
The actual realization of some headline risk in many ways presents a fresh “Wall of Worry” for all related assets. In this case, my preferred vehicle remains KEF. Is KEF my least risky holding? No, but I am interested to own, or with price sensitivity add to a KEF position at a discount greater than I can sell in the now announced tender offer. To the extent of participation, I view the relative valuation variance as a margin for error in my interim holding of a position accessing Korea. This may or may not make KEF better or worse than the passive approach of the iShares product (EWY)
I do not expect all my shares to be taken out in the tender, certainly. Among the numerous observations from a Seeking Alpha contributor I respect, “Gwailo”, is the fact that there is plenty of sophisticated ownership in this security.
Tender results will largely inform the extent to which KEF remains a candidate for further activism induced liquidity events. Regardless, this year’s election of Phillip Goldstein as a Class I Director to serve a term that expires on the date of the 2013 Annual Meeting of Shareholders is relevant to my assessment of intermediate term risks to the relative market valuation of “discount”. Buying a closed-end fund at a discount is not a good think if that discount expands rather than narrowing.
Phillip Goldstein’s Bulldog Investors, is a prominent closed-end fund activist who seems to have achieved value unlocking results on numerous occasions. In my view, their presence has been relevant to liquidity events that have already been announced for other holdings in my account licensed to Covestor’s Well Intentioned Activism Profile Closed-End Funds model, including Blue Chip Value Fund (BLU) and Riversource LaSalle International Real Estate (SLS). Although now announced, those liquidity events have not yet come to fruition. Another, SunAmerica Focused Alpha (FGI) has been argued here on Seeking Alpha to be an ongoing candidate for Activism in arrears of its first liquidity event (citation: “Gwailo”).
One may have reason to anticipate that going forward, KEF shareholders may benefit not merely from active management and the potential to climb a wall of worry, but increasingly shareholder friendly Governance Decisions specifically at KEF.As always, "Mr Market" is the only judge that matters. Only Mr. Market will showcase whether KEF or EWY is the better, or least bad alternative.
Disclosure: Long KEF, SLS, BLU, FGF, and FGI in accounts licensed to various Covestor Models including those cited in text. Any of Dan’s positions may change at any time, without notice. Covestor is a Registered Investment Advisor (“RIA”) licensing Dan Plettner's data to create models for its clients. In addition to receiving royalties from Covestor, Dan receives income for securities research. Dan is neither a Registered Investment Advisor, nor an employee of Covestor.