The notion of “Asset Captivity” among closed-end funds doesn’t get much mainstream press. Instead, mainstream press focuses on a primary symptom: the illusion of a Black Friday sale on the New York Stock Exchange. A market price representing a discount to Net Asset Value (“NAV”) is only a relevant bargain if the discount is going to narrow at some point in time. Such occurs less often among funds whose governance choices could conceivable be interpreted as prioritizing Assets Under Management (“AUM”) or billable assets over shareholder value.
Neuberger Berman might be observed by some as being as least somewhat disinclined toward Asset Captivity. They have circumstantial tender offer programs for at least Neuberger Berman California Intermediate Municipal Fund Inc. (NBW), Neuberger Berman High Yield Strategies Fund Inc. (NHS), Neuberger Berman Intermediate Municipal Fund Inc. (NBH), Neuberger Berman New York Intermediate Municipal Fund Inc. (NBO) and Neuberger Berman Real Estate Securities Income Fund Inc. (NRO).
Those tender offer programs provide for no extent of tenders unless the funds trade at less than 90 cents per dollar of NAV on an average daily basis over a 12 week measurement period. Neuberger Berman Closed-End Funds announced on November 12th, 2010 that each of NHS, NBH, NBO and NBW traded at an average daily discount to NAV of less than 10% and therefore in accordance with each Fund’s respective tender offer program will not conduct a tender offer.
Only NRO traded at a low enough relative valuation to be eligible for any tender offer. It was eligible for a tender offer for between 5% and 20% of its outstanding common stock at a price equal to 98% of its NAV.
Having traded far enough below NAV to be eligible for a tender of 5% to 20%, NRO on November 19th, announced that it would be tendering for up to 5% of its outstanding shares at a price equal to 98% of its NAV. In my reading of the announcement, I saw no discussion of the governance role, nor rationale for the tender being the minimize size from the tender offer program’s range.
Many people are very trusting of Wall Street’s motivations. There is nothing wrong with that. I pass no judgment on Neuberger Berman, but I am awake to observe the facts. According to Morningstar whose quantitative assessments are closely linked to their ranking system, NRO received 1 out of 5 stars and had a 2009 Total Expense Ratio Reported of 3.18% and Total Expense Ratio Adjusted of 2.87%. Expenses are not paid to shareholders, rather other stakeholders.
Quantitative data is free on-line and in print to anybody these days. Quantitative data about average discounts, performance, and expenses are of course readily available on NHS, NBH, NBO and NBW. Some liquidity and availability to redeem shares for a market discounted closed-end fund is perhaps better than no liquidity at all. I am always cautious of applying “rules of thumb” but the rule of thumb is that tender offers are good things. And, at least Neuberger Berman isn’t announcing that it widening the necessary NAV/Market valuation gap for tender offers to take place, as was recently the case for one alternate closed-end fund that I viewed in objectivity as a better short-selling candidate than potential long investment.
The people at the Neuberger Berman Funds may be great people with great principles. I have merely observed some facts which may or may not be relevant. Similar facts can be observed in other fund companies. Unless I perceive the presence of or likely prospect for well intentioned closed-end fund activism, and have a relevant thesis in which to surround those facts, I am generally disinclined to take long positions in such funds.
Disclosure: Your author has no position in any of the securities mentioned here and is not compensated for writing this piece. Dan’s trading decisions, frequently involving closed-end funds are licensed to Covestor Ltd (“Covestor”). 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.