Dan Plettner's  Instablog

Seeking Alpha has published a number of articles on DWS RREEF Real Estate Fund (SRQ) and DWS RREEF Real Estate Fund II (SRO), some of which have lent to propaganda. I will not author a piece that can be used as propaganda, rather I'll reflect on a timely financial opportunity apparent thanks to newly public information, which has not been publicized.

SRO currently trades at less than 80 cents per dollar of NAV and I believe shareholders' second opportunity to liquidate the fund at NAV will be successful. On the afternoon of Thursday, August 20th 2009, DWS made public with little publicity the actual voting results from the earlier liquidation votes.

In the case of SRO, voting polled more than 2-to-1 in favor of liquidation. Thie writing is clearly on the wall, and everybody can now read it. Those who desired reassigning advisory fees to liquidation were never foolish; they were acting in their own unique interests. All shareholders will now recognize that SRO's contracts will never be reassigned. Even the uniquely motivated shareholders who wanted to redirect assets under management fees to certain related private companies are not so foolish to vote against liquidation this time.

The actual results released today are in sharp contrast to market prior assumptions reflected in "Voters Have Spoken". The new public information will inherently create a more logical shareholder base as intelligent market participants buy SRO at even narrow discounts with full confidence in a succesful liquidation.

Its easy to criticize DWS given 2008's NAV performance of both SRQ and SRO. But those with savvy and market maturity have to applaud their governance -- DWS is sacrificing both total assets under management and its management fee rate for shareholder benefit. DWS is not choosing to hold their shareholders captive with only the option of selling their shares below NAV.

DWS is in the assets under management business does not want to generally lose assets under management in general. DWS does want to do what is right for their shareholders given what already occurred. Every shareholder can move on and choose any portfolio manager they wish (including the opportunity to invest in the alternate management's existing funds at a huge discount).

Much as $1 is better than 80 cents, a liquidity event is a better alternative than no liquidity event. It appauls me to read propaganda designed to influence average shareholders into ignoring common sense.

Disclosure: Long both SRO and SRQ.

There seem to be a good number of traders who are acting on the belief that the enormous volume change in BIF week came from average readers of a Weekender article, where a portfolio manager picked BIF, referencing a possible narrowing of its discount due to its dissidents.

I am not going to publicly agree or disagree with Mr. Barone's general premise that an underlying battle between the fund and a couple of dissident shareholders will unlock the value...

What I will say is that I disagree with the commonly held belief that average readers caused the volume and thus BIF's move. I won't be sharing all the reasons for my opinion, but I will share this:

BIF on Monday traded about 13.9 times trailing 10 day average.

The other 4 securities recommended traded anywhere from 0.58 to 1.24 times their trailing 10 day averages.

The traders with a contrasting belief to my own about what is driving the BIF volume have had motivation to put on what is called a pair trade -- buying BTF and shorting BIF. Some of these same traders would then likely suggest others to buy BTF instead of BIF, or swap from BTF to BIF on Message Boards... before they close their trade by buying back the BIF that they sold short and selling the BTF they bought long.

Do I have underlying beliefs as to where the volume came from based on my own involvement and my own research?

Yes, I do. If my underlying beliefs are correct, all Boulder Growth and Income Fund Shareholders should benefit. I share my opinion because I'd be saddened to see unsophisticated BIF shareholders get talked into switching to a different Horejsi Fund right now, particularly with the expectation that I'm right.

Do I ever want/hope/expect to sell?

Well, yes... absolutely. I've shared my personal take on the current management group. Some of the articles initially published by Seeking Alpha are available here:

home.fuse.net/danplettnercef/

Also, I have nearly all my eggs in one basket right now... BIF. So I have enormous motivation to diversify.

Have I sold even 1% of my shares so far this week?

No.

Could I sit silently next to my grandmother if she had an idea to buy the sister fund BTF?

Probably not. Although I do hope that someday average shareholders of BTF get an opportunity to sell at or near NAV. Relunctantly, I don't think they ever will.

Again, I have continued my research and I am open to talk to other shareholders who can initially e-mail me at plettner@fuse.net. If you wish for me to reply, please include your contact information and detail as to when you became a shareholder.

I am a shareholder of the Boulder Growth and Income Fund (BIF). While I have not published recently, I have continued investigating the activities at the company. I would be interested to talk to other shareholders who owned the stock prior to February 20, 2008. I can be reached at plettner@fuse.net.

I am open to speak over the phone, but prefer to first receive your e-mail indicating when you purchased, and where to reach you.

Its awfully disturbing the level of analysis that lands somebody on Bloomberg TV:

http://www.clipsyndicate.com/video/playlist/1778/1008243?title=bloomberg

Commentator had previously recommended BTF in February... discount widened since... said its even better... failed to discuss why the Boulder Funds trade at among the greatest discounts in all of the Closed End Fund space.

Speaks of managers “eating their own cooking” as large shareholders without mentioning that they have actually been major sellers of BTF recently and major buyers of BIF, much less explaining why.

In short, it was a positive piece that (in my view) left people with an inverse understanding of reality.

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Now "ClosedEnd" on Twitter  Also, press contact: PLETTNER@FUSE.NET

The articles I have written at Seeking Alpha which pertain to the Horejsi Group, Boulder Investment Advisers, LLC, BIF, BTF, FF, DNY, SRO, and SRQ are no longer available as articles on Seeking Alpha. Seeking Alpha did explain why. Below is the text of an e-mail I received from Seeking Alpha this morning. In my view, it provides a lot of insight into the ongoing priorities, tactics, and ethics of the Horejsi Group (who is now attempting to take control of SRO and SRQ). I can understand the position Seeking Alpha was in.

I personally removed each of my blog entries, for different reasons.I am going to take a bit of time to sit back and see if the Horejsi Group actually does something proactive to do something good to demonstrate that they are trying to serve their shareholders.... Imagine that.... If they do not, I certainly will continue to use my voice through this Instablog or other publishing mediums while awaiting enforcement action -- I do expect enforcement action which will benefit BIF shareholders and the public, eventually.

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I began working in Financial Services in the 90s with no appreciation for the complex nature of Closed-End Funds as an investment instrument. The only primers to which I was presented were narrowly constructed, and closely paralleled the firm's "research". I was asked to train rookie brokers and service experienced brokers regarding Closed-End Funds before I was even aware of my own then-inadequate understanding of the Closed-End Fund. I don't blame anybody; why would the firm fully educate myself or any employee whose collective responsibility was to gather assets from clients who were not generally interested in the nuances? To expect more would be akin to expecting that McDonald's train its drive-thru representatives about saturated fats.

The purpose of this primer is to brief sophisticates who themselves may delve further into the nuances. I've asked myself what I would create as "Lesson 1" for somebody whose eventual responsibility would be to invest in Closed-End Funds with my own money. Yes, Closed-End Funds are strange. As such, I'll author this primer within the framework of a strange coin. One side of coin is "heads", representing Closed-End Funds from the Investor's Perspective. The second side represents the Managerial Perspective of Closed-End Funds. Did you guess it? Its "heads" yet again. I do believe that Closed-End Funds can be a win-win scenario for ethical or “good” participants. And most but not all participants are good.

"Heads Up": Closed-End Funds Foster Investor's Alpha

Alpha is the part of each investor's return which is attributable to investing talent rather than the extent of market risk taken. The Closed-End Fund Marketplace is particularly inefficient, which fosters alpha for market participants. Some participants achieve a positive alpha and others achieve a negative alpha. Given the preponderance of apathetic participants and significant secondary market inefficiencies, I find Closed-End Funds to be a comparatively easy investment product with which to achieve a positive alpha.

The preponderance of apathetic Closed-End Fund investors is heavily related to the Initial Public Offering ("IPO") market. Original investors of most Closed-End Funds are traditionally "sold" the product (generating a broker's sales credit) in contrast to "buying" the product on the basis of diligent research. In time, Closed-End Funds usually make their way to trade at discounts to their Net Asset Value ("NAV"). By definition, Closed-End Funds do not accept ongoing inflows from investors, nor meet redemptions. Once the sales credits are paid nobody effectively "markets" Closed-End Funds with similar budgets to their open-end counterparts.

In the secondary market (ie: New York Stock Exchange) Closed-End Funds trade based on supply and demand, just like a stock. Closed-End Funds are not sexy so there is little media coverage even in drastic situations. In May of '09, I communicated with both the Wall Street Journal ("WSJ") and CNBC regarding the most compelling and Closed-End Fund situation of which I've ever been aware. I still hold some hope for WSJ to eventually cover the story but merit and social need alone do not justify media resources. The media has observed that their audience does not generally care about Closed-End Funds. The product's complexity does not help its own cause with the financial media generally being inadequately trained to report on Closed-End Funds.

Truly Independent Research on Closed-End Funds is as scarce as media coverage. I've only observed one Closed-End Fund Research Team demonstrate exceptional talent in qualitative analysis; even there I also observed conflicts of interest to impact the research.

I love the secondary market for Closed-End Funds. When researching, I've often felt like a kid in a candy store. Perhaps my passion for the Closed-End Fund as an investment instrument brings out the kid in me. I have entered some investments based on a simple long-term or short-term thesis. I have added dramatically to other positions based on highly complicated investigative analysis. I have talked to mutual fund managers who use algorithms to invest in Closed-End Funds. Without their resources, I have use publicly available websites to aid my choices, and I certainly have not felt handicapped. I have even talked to traders acting on behalf of brokerage firms who took the same Closed-End Fund positions as my own in their effort to achieve alpha for the firm's own investment portfolio.

Closed-End Funds publish their NAVs and trade with dramatic valuation variances (their premiums and discounts). I believe sophisticated investors can assess the patterns affecting those valuations in their quest for alpha. Some simple patterns are seasonal. Other patterns may relate to the public's fear and greed as measured by mutual fund inflows and outflows. Patterns of fear or greed can also be specific to certain assets classes. In my own experience the attractive entry and exit points in Closed-End funds (as represented by market value vs NAV) often coincides with market bottoms and tops which I have sought to exploit.
 
For inactive long term investors, a simple long term thesis might be based on a fund being well managed, with good governance and a low expense ratio, at a reasonable valuation. Or, that investor might choose an array of funds in different specialized asset classes which blend together to suit their desired portfolio construct. Either way, I believe intelligent investors can do better with good Closed-End Fund Choices than with good (Open-End) Mutual Funds Choices. I also believe the opposite to be true. I believe foolish investors will do worse with bad Closed-End Fund Choices than with bad (Open-End) Mutual Fund Choices. The choices are everything in Closed-End Funds. Its quite ironic that Morningstar and Lipper offer absolutely no qualitative research on Closed-End Funds. After conversing with Morningstar's Director of Personal Finance with reference to Morningstar's own "strategy", I have the impression that the cost of competent analysis for qualitative research would not produce the necessary economic benefits for Morningstar's own business model.

"Heads Up": Closed-End Fund Structure Offers Managerial Advantages but also Opportunities For Managerial Abuse

Closed-End Fund managers are not subjected to the challenge of investing new daily inflows, nor do they need to maintain cash to meet daily redemptions. On occasion, leveraged funds may need to liquidate holdings to maintain coverage ratios, but this is a much more easily managed challenge than meeting daily inflows or outflows. Leverage itself can be a great tool for the Closed-End Fund manager, allowing access to additional investing capital at a lower cost than anticipated long term returns. While leverage was harmful to shareholders in 2008, it is generally a positive tool when used by well-intentioned managers.

All other things being equal, Closed-End Funds should have lower expenses than their open-end counterparts because they do not have any purpose for marketing themselves to new investors. Lower expenses make it easier for any Closed-End Fund Manager to achieve any level of return in comparison to an Open-End Mutual Fund Manager.

The advantages are not the only differences on the sponsors side. The notoriously apathetic nature of the Closed-End Fund Investor derives from the IPO issuance and certainly tempts “Bad Citizens” on the Sponsor Side to take advantage of shareholders. Because there is no mandate allowing daily redemptions, the Bad Citizens do not stand to lose assets under management along with their own integrity. Thus Closed-End Fund Assets under management are often called “Captive Assets.”

Most Closed-End Fund Sponsors are “Good Citizens”, and most Closed-End Fund Boards of Directors look out for the interests of their shareholders. Recently, I observed that a group who suffered bad investment results actually intended to liquidate itself – sacrificing its own ability to earn assets under management fees.

There are a lot of things to watch for from management side of Closed-End Funds. Tender Offers and Distribution Policies are generally good and are generally suggestive of the people behind a Closed-End Fund being good citizens of the space. There is a place for Rights Offerings, Solicitations, and Shareholder Meeting Adjournments but these governance tactics are often suggestive of bad citizens within the Closed-End Fund arena.

As with any investment instrument, it is important to choose only Closed-End Funds that are suited for you; always do your research before making any investments. I have invested in Closed-End Funds with perfect trust of the Good Citizens behind them. I also own a Closed-End Fund where I am fully aware that Bad Citizens are running it. I will need to open, read and vote my proxy to protect my interests. I even actively write the Board of Directors in that instance. I do so because I believe that the Board of Directors of any Closed-End Fund works for its shareholders. If you chose to use Closed-End Funds for your own investment goals, I hope that this primer will assist you in understanding the product's nature and choosing what is most suited to your own level of involvement. This primer has certainly been limited and I'll do my best to answer questions as comments. I've specifically chosen to constrain what I discuss to be the important fundamental understandings of the Closed-End Fund Product. Most Closed-End Fund investors do not know much of what you have just read. Don't stop your learning here though, and remember that there is no substitute for experience.

 

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