Cornerstone’s Unauthorized Liquidation

The Cornerstone Total Return Fund (AMEX:CRF) has been in liquidation for years. This has taken place without shareholder approval despite New York State Laws that require shareholder approval for such actions. Cornerstone is a New York State Corporation and therefore subject to the rules and regulations of New York State. In spite of governing regulations, Cornerstone’s board of directors has unilaterally decided to distribute monthly dividends to shareholders at a rate that is totally unsustainable. Liquidation of this fund is virtually guaranteed with the current distribution policy.

The Cornerstone Total Return Fund is a closed-end mutual fund with $33 million invested in a portfolio of blue chip stocks. With 5,343,138 shares outstanding, each share of stock owns $6.27 worth of these underlying blue chip securities as of July 25, 2008. This value per share is commonly referred to as the net asset value [NAV] per share.

As of January 1 2002, when the current fund portfolio manager took control of the fund, the NAV was $18.30 per share. Since then Cornerstone has been aggressively distributing money to shareholders. From January 2002 through July 2008 Cornerstone has distributed $13.57 to shareholders in monthly dividends. Adding today’s NAV of $6.27 per share to the cumulative distributions in the amount of $13.57 per share we can calculate the actual returns earned on the fund’s portfolio. Effectively, the portfolio advisor has earned $1.54 for shareholders ($13.57 + $6.27 = $19.84 less the initial NAV of $18.30 per share). Considering this return has been earned over six years and seven months, Cornerstone’s annual rate of return on invested assets approximates 1.24 percent.

Regardless of this history of meager returns Cornerstone’s board of directors has committed to pay out 21 percent of assets per year, as readjusted annually. However, since the fund has earned only tiny returns the distributions end up liquidating the fund. Historically about 95 percent of the dividends have been a return of investor’s capital. Cornerstone is paying back shareholders their own money.

Furthermore, the high payout rate results in faster and faster liquidation rates throughout the year. For example, currently Cornerstone is distributing dividends at the rate of $1.95 per year, which is 31 percent of NAV ($6.27) per share.

Technically, by readjusting the distribution rate every year Cornerstone’s ultimate liquidation may be prolonged. This, however, should not be reassuring to investors. Cornerstone already has a high expense ration (1.50 percent per year) and certain costs of running the fund are fixed. Hence as assets decrease the expenses as a percentage of assets go up.

There are two other Cornerstone Funds, the Cornerstone Strategic Value Fund (AMEX:CLM) and Cornerstone Progressive Return Fund (AMEX:CFP) that also have unsustainable aggressive distribution policies. All three Cornerstone funds have market prices well in excess of underlying per share net asset values.

Cornerstone Total Return Fund’s premium is 106 percent. Investors are paying $13.00 per share for $6.27 of value. If the music stops and investors end up losing $7 per share will the board of directors have any liability for proceeding to liquidate the fund without shareholder approval? Perhaps someday we will find out.

Disclosure: Short CRF

Comments

[Vladimir Se...:]

How much is your broker charging you to short this thing, if you don't mind me asking?

2008 Jul 30 04:58 PM

[kylesch:]

They clearly state that they return capital[1], investors know what they're doing. I bet you can make a pretty penny by loaning shares of CRF to someone who wants to short it. Perhaps that's what Renaissance Technologies is doing with their large position.

[1] www.businesswire.com/p...

2008 Jul 30 07:30 PM

[tigereyes337:]

For all of those who have trouble paying attention to detail I will highlight some excluded facts so that other wiser investors can foster a better educated decision in choosing such an investment vehicle.

CRF has traded and paid consistently since 1981. In 2001 is when they started paying monthly payments.

For someone to assume that the company is soon to go under would be downright foolish if not stupid. I would add that if one would like to see the facts plain and simple go to etfconnect.com and see for yourself the relevant information that professionals know when they purchase those high amounts of shares. Besides after the Army let me out I needed something to suppliment my income and have used it consistently since 2001 myself without a hiccup. So in a word... I endorse CRF and CLM.

2008 Jul 31 08:44 PM

[tigereyes337:]

For those who are smart enough to check the facts. Ask yourself... Why has CRF and CLM traded and consistently paid since 1981? So fellow bloggers, go to etfconnect and look them up yourself to get the real truth for a more educated view.

2008 Jul 31 08:47 PM

[notsosmart:]

nothing better than an educated view of the goldilock scam market.its not business-just scams.the insiders grab their profits & create legacy fortunes & the herd makes it easier & easier.no,i have no charts,graphs,or historical #s to prove this.

2008 Aug 01 03:26 PM

[will799:]

I think these funds are ripoffs, but they confuse me. Looking at this thing from the manager's point of view why are they doing this? They take over, and immediately reduce their pool of managed assets. They are liquidating their own assets under management and destroying their own sale value as a management company. It seems even more destructive to the manager than the stockholders. And at stome point the fixed costs of operation will force a liquidation, and then the manager is just out of business. Does anyone see the logic here, or a sensible business plan? Maybe someone's comments will cast some light on me.

2008 Sep 08 10:06 PM

[phine958:]

It should be no surprise that Renaissance Technologies or any other Institutional investment companies/hedge funds have found Cornerstone and want to control it, after all Cornerstone has made money since the 1980s! It’s also in the nature of a hedge fund to want all of these two money making Cornerstone funds for they’re hedge fund clients. So they take over the Cornerstone board to do it and ram through a reverse share split. While it’s uncertain what the effects of a one for four or a one for two reverse share split would actually do for or to Renaissance Technologies it would serve Cornerstone itself nicely to have two-thirds of the original shares in their coffers to sell at even this reduced rate? With total net assets of $94730576.00 between the two Cornerstone funds the hedge fund could pick up two-thirds of the total shares for only a couple of dollars per share. Is this illegal- you bet! Is this what the FTC is looking for, I hope so? This is stealing shares of the Cornerstone funds from lesser share holders to benefit they’re hedge fund clients and that’s manipulating a fund. So what can be done to prevent this? Find your congressman or woman and e-mail him or her. Get on the Federal Trade Commission website and complain. New York has a Better Business Bureau go to BBBOnLine and complain, you’ll be referred to the proper agency! While in time Institutional investment companies may indeed take over Cornerstone as well as most of the CEFs around but they shouldn’t be allowed to steel them.




On Jul 30 07:30 PM kylesch wrote:

> They clearly state that they return capital[1], investors know what
> they're doing. I bet you can make a pretty penny by loaning shares
> of CRF to someone who wants to short it. Perhaps that's what Renaissance
> Technologies is doing with their large position.
>
> [1] www.businesswire.com/p...
>

2008 Oct 13 09:39 AM

[Longinvestor:]

So CEF Analyzer, you are really a short seller ("Disclosure: Short CRF") rather than investor as you describe yourself..."CEF Analyzer (pseudonym) is a full time professional/private investor with over 20 years experience. His areas of focus include special situations, arbitrage and deep value plays. He received his MBA from Wharton and studied Engineering as an undergraduate student."
Just how shorted is CRF? See here:
shortsqueeze.com/?symb...

Feeling the squeeze yet?

Apr 07 03:58 PM

[Joe Snow:]

What do you people think "return of capital" means? The fund does not earn enough income from it's positions to cover the distributions it is making so it has to sell off assets to make the payments. They are doing this without regulatory or shareholder approval. Do you think the money you are receiving is being pulled out of thin air? Do you think the payouts will continue forever? When the assets are depleted, the payments will stop and you'll be left holding a lot of worthless paper. It is a mistake to use past performance as an indicator of the future. Bernie Madoff's ponzi scheme paid out for many years, that didn't make any more legitimate, and the fact that CFP has been paying for so long does not make what theyare doing any more legitimate, either. If you want to see where the money you are getting every month is truly coming from, I suggest you monitor the funds NAV (net asset value). It will fall month after month that the distribution is in place. Once it falls to $0, it's game over.

Sep 20 07:45 AM