The Taiwan Greater China Fund (TFC) is a closed-end fund that invests in companies traded on the Taiwan Stock Exchange which derive (or are expected to derive) a substantial portion of their revenues from exports to or operations in mainland China.
Over the last month or so, there have been some dramatic changes at TFC:
- On April 13, the fund announced that the Board of Trustees unanimously approved a proposal to convert the Trust from a closed-end fund to an open-end fund, subject to shareholder approval at the Trust’s 2010 annual meeting on May 27, 2011.
- The Board was required to submit to shareholders a binding resolution to open-end the fund, because TFC traded at an average discount to NAV of more than 10% during a 12-week measurement period.
- There was a proposal to replace the current investment advisory agreement. Nanking Road Capital Management will be replaced by CCM Partners and Nikko Asset Management.
- The Board approved, and recommended that shareholders approve, amendments to the Trust eliminating the provision setting the terms of the trustees at staggered three year intervals and to multiple multiple funds to operate under the trust. This would eliminate the need for annual meetings.
- The Board proposed an amendment to the investment objective of the Trust to expand the geographic focus from the Republic of China to the Greater China region. The Board felt that if the open-ending proposal is approved, the marketing of the Trust’s shares would be more viable with the broadened investment focus.
- The Board also approved removal of the prohibition against short selling, writing put and call options and buying securities on margin, and can buy equities that are not traded on the Taiwan Exchange.
- On April 21, the Board appointed Jon Kathe the new Chief Compliance Officer, Chief Financial Officer, Treasurer and Secretary of the Fund replacing Regina Foley, who resigned.
- On May 9, the Board appointed Frederick Copeland as the CEO and chairman of the Fund. The Board accepted the resignation of Steven Champion, who will remain as the portfolio manager of the Fund.
- On May 19, the Fund commenced its semi-annual Repurchase offer to buy 5% of its shares at 98% of NAV.
On May 27, the shareholder meeting was held. As expected, about 70% of the shares were voted in favor of converting the fund from a closed-end fund to an open-end investment company. The other proposals were also approved.
I have been a long term shareholder in TFC, and have participated in the semi-annual repurchase offers. This year, the proposed open-ending of the fund has reduced the discount of TFC down to -3.6%.
If you tender your shares of TFC, you get 98% of NAV right away for the shares accepted. If you don’t tender, you should get 100% of NAV when the fund open-ends, but there is a longer waiting period. The devil is in the details.
Most closed-end funds that open-end impose an exit redemption fee. For example, the Westcore Blue Chip Mutual Fund (WTMVX) which merged with the closed-end Blue Chip Value Fund imposed a 2% redemption fee payable to the fund for three months after the reorganization date.
Now that the open-ending proposal has passed as expected, you would expect the stock to trade near NAV. But closed-end funds sometimes have irrational price movements based on headline news stories. If TFC moves to a premium over NAV, I plan to sell my shares.
Disclosure: I am long TFC.