- The Boulder Total Return Fund pays its managers $6 million for virtually nothing.
- An activist investor would stand to gain a 19% low-risk return should s/he be able to open this fund.
- The 80% "Lifeboat" provision is one of the most shareholder-unfriendly measures ever taken by a CEF.
The Boulder Total Return Fund (NYSE:BTF) is a closed end fund which buys large positions in undervalued companies. Boulder Investment Advisors, LLC, the company which manages the fund has allocated almost 50% of the fund's assets to Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), 18% to a money market fund, 17% to Yum Brands (NYSE:YUM), 7% to Wal-Mart (NYSE:WMT), and the rest of its funds to large companies like J.P. Morgan (NYSE:JMP) Wells Fargo (NYSE:WFC), and Cisco (NASDAQ:CSCO). While this fund may serve as a great proxy to those who want to invest in that pile of blue chips, as the fund trades at a 19% discount to NAV, the very existence of the fund is not in the interest of shareholders.
The Best Job In The World
The managers of this fund have the best jobs in the world. To maintain their portfolio, all they really have to do to collect the 1.9% annual management is to issue four quarterly reports. No trading, no analysis, no research necessary. That's $6 million when almost 80% is either a cash proxy, Berkshire Hathaway, Yum Brands. Why pay 1.9% for? Maybe in hopes of acquiring those companies for a discount, or maybe because you think the 19% discount to NAV will close. However, the long-term discount to NAV has hovered in the teens, and for whatever irrational reason the market may give us, will likely continue to stay there.
If management of the fund really did want to act in the interest of its shareholders then it would open or liquidate the fund and distribute the automatic 19% gain to its shareholders, but too bad that will never happen. Unfortunately, since this fund's inception it has had what's called a "lifeboat provision", or a clause in its prospectus making the liquidation of the fund nearly impossible. Unfortunately, in order usurp fund management, a full 80% of shareholders have to vote to oust management. While some hedge fund managers such as Phillip Goldstein of Bulldog Investors have been successful at opening CEF's, 80% is a high threshold, especially considering the fact that major shareholders hold over 20% of the stock. In the mean time, this CEF may be a great way to invest in blue chips at a discount, but don't count on the NAV discount to close without the help of one of the big boys.
In light of all of this, while many activist investors are looked at as corporate raiders when they act in their own interests and not in the interests of smaller shareholders, here is the chance of a lifetime for the right fund manager to prove otherwise. So please, go ahead and prove that you are working for the little guy too, with a mere $200 million you could rouse enough support to liquidate the fund, and earn close to 20% in the process.
Note: I attempted to reach out to the fund before writing this article but I was unable to reach anyone who was willing to even discuss this topic with me.
Additional disclosure: I may open and/or close positions on behalf of myself or clients after publication of this article. Feel free to contact me with regards to shareholder initiatives to open the fund.