In a recent edition of Value Investor Insight, Phil Goldstein and Andrew Dakos of Bulldog Investors described their focus on investing in closed-end funds trading at wide discounts to their net asset value.
Let’s talk about a current closed-end idea, Cohen & Steers Select Utility Fund (UTF)?
PG: The fund invests primarily in utilities, with some REITs and preferred securities as well. Relative to other Cohen & Steers funds and to similar closed-end funds, it was trading at a high discount, 13-14%, when we first got interested last summer. We liked that the shareholder base was fairly sophisticated and that it was easy to hedge out as much utility-sector NAV risk as we wanted. When that’s the case, we can put more capital into a single idea.
We started accumulating shares and filed a 13D. Given that we’ve been doing this type of thing for a long time, that can often lead to some turnover in the shareholder base, from what we call weak hands to strong hands. Art Lipson of Western Investment, for example, subsequently filed his own 13D. The turnover in shareholders in and of itself can start to narrow the discount.
What’s happened since?
PG: Even before we had much opportunity to sit down with management, they made a host of non-shareholder-friendly bylaw changes, giving us a clear sense that the lawyers were in control. Art Lipson decided on his own to start a proxy contest to change the board and we have filed a shareholder proposal for a contingent tender-offer plan, in which the company would do a partial tender for shares whenever the discount hits 7.5% or more.
At a recent price of around $22.90, what upside do you see for the shares?
PG: The current NAV is just under $25, so the discount is around 7%. That’s narrowed since we first got involved, but it can move around a lot day-to-day. One big issue here is that the fund’s annual meeting is on April 1, at which shareholders will vote on Western’s slate of directors. If Western wins, the discount will likely continue to narrow, providing us a very nice return even from today’s price. If Western loses, potential buyers will likely see plenty of opportunity to buy in again at a very attractive discount.
AD: It’s ironic that Cohen & Steers portrays itself as a corporate-governance leader. We’ll get another indication at the annual meeting how committed they are to good governance when it impacts their fee-income stream. Even if the proxy contest fails, we don’t at all expect this to be the end of the story with this fund.
You mentioned earlier the “unique” Pioneer Municipal and Equity Income Trust (PBF). Why do you find it attractive?
AD: The fund has 75-80% of its assets in municipal bonds and the rest in a wide variety of equities. We got interested in it last summer, after Art Lipson ran a proxy contest against it and won, gaining two seats on the staggered board. It was clear shareholders wanted NAV for their shares and we felt it was only a matter of time before management gave it to them. In the worst case, the board would continue to do nothing, resulting in another dissident board slate winning at the next annual meeting and then the new board doing the right thing. Even with all that, we were able to buy in at a 10-11% discount. When nothing happened, we made partial tender offers for three million shares and – despite management’s opposition – got 2.6 million. If you add up what we own and what other shareholders we know are on our side own, that’s 40% of the total shares. There’s no doubt that in a proxy fight we’re going to win.
With the shares at $11.95, where is the discount to NAV today?
PG: It’s been around 8%. That’s quite attractive, given that we think there’s a 99% probability that discount is gone before the end of the year, resulting in a nice annualized return just from that. If you agree with people like Wilbur Ross and Bill Gross that municipal bonds are a good buy now, this is a great investment. Are you hedging against NAV risk here? AD: Not against the municipal bonds, but we’re using general-market ETFs to hedge out some of the equity exposure.
How important is the dividend yield, currently over 11%?
AD: It’s a nice thing to have. One of our proposals to management was to increase the monthly distribution – even if it meant returning some capital – which typically has a positive impact on the discount to NAV. They’ve done that, which is one reason the yield is so attractive.
In general, can closed-end funds be a good way to play certain themes or sectors?
PG: Yes, which is something value investors tend not to appreciate. If you like Berkshire Hathaway (BRK.A) , for example, wouldn’t you want to buy it at a discount to the market price? There’s a closed-end fund out there called the Boulder Total Return Fund (BTF), which has something like 35% of its assets in Berkshire and trades today at a discount to NAV of around 7%, which is down from 14-15% at various times in the past.
Say you’re interested in financials now that their shares have fallen off a cliff. There’s a closed-end fund called the First Financial Fund (FF), run by a manager with an excellent long-term record, trading at a 10% discount to NAV. Don’t you improve your odds of success if you start out paying 90 cents on the dollar? These opportunities are everywhere. If you like gold, ASA Limited (ASA) trades at a 9% discount and there’s a proxy fight going on there now. If you like energy, BlackRock Energy and Resources Trust (BGR) trades at a 14% discount. I’m not saying now is the time to buy gold or energy or any sector, but if you like the fundamentals and think a sector is cheap, you should always look for a closed-end fund trading at a discount.