Gwailo

Why Central Securities Corporation Looks Attractive

> Eric Fox has asked a very good question: "What is the tangible book value per share of PRAC? Liquid publicly traded insurers will usually trade at a multiple of tangible book value."

After knocking out goodwill and deferred acquisition costs, PRAC shareholder's equity at end of '08 was $262mm = @ $1,440/sh. Revenue/sh was about $2,500 and after-tax income was @ $196/ sh, for a @ 13% ROE.

For comparison, the Yahoo stats on Progressive Corporation (PGR) show trailing P/E of 11.8x, P/Sales of 0.76 and P/Book of 1.97, with an 18.7% ROE. So $2,000 - $3,200/sh for PRAC looks to be within the range of reason.

As for CET, note that Wilmont Kidd, who has run the fund for the last 30 years or so, is now age 68, that Kidd family trusts hold about 14% of the stock, and that Mrs. Kidd's family foundation owns an additional 34%. CET makes a very decent long-term core holding with a midcap emphasis, but don't expect any activist action here.

As for that 2.53% turnover ratio, sometimes it's better to pay fund managers *not* to buy or sell. Didn't a Warren Buffet shareholder letter a few years back quote Pascal, to the effect that most of our troubles come from not being able to sit still?

'Gwailo ("Et ferme ta bouche.")

Make Money with Closed-End Fund Activism

Hi, Joe Eqcome

Thanks for the academic links. You've pulled together a lot of good research on your site. The Wharton study is additional proof that activists tend to target CEFs with large discounts and significant institutional ownership. See their fn. 27: "In a private interview, Phillip Goldstein said that he targets funds with more than 15% institutional ownership." They looked at data from 1988 to 2003: since that time institutions have increased their share of CEF ownership. In addition -- and this is the central point of my article -- about a dozen large hedge-type funds now specialize in CEF investment. They aren't "front-line" activists, but they stand to profit from activism, and I suggest that individuals might gain from following them.

You're being polite in calling the Claymore report on tender offers
"non-academic". (The technical term in Finance theory is "crap.") The Claymore report shows that if you (a) don't count "terminated" funds where tender offers were followed by open-ending or liquidation, (b) don't count the profits made by shareholders who responded to tender offers, and (c) explain away any results that you don't like, you can conclude, inconclusively, that: "Given the results of this study, it is unclear if actions such as tendering shares produce any long-term benefit for shareholders."

Of course, if you were Claymore, you could then propose an in-kind tender for 40% to 45% of the shares of DCS in order to deflect a challenge by Phil Goldstein to your profitable sale of the fund management contract. You could even file a Form DefA 14A on 9/14/09 that says "a tender offer structured in this manner would be in the best interest of all shareholders of the Fund." Considering what fate has in store for hypocrites, Joe, I'm sure you're glad that you're not Claymore.

Keep up the good work. And please do help extend this line of research. Thanks,

'Gwailo

CEF Investors Can't Expect Big Year-End Payouts

> "All HQL dividends last year were 'ordinary.'"

HQL doesn't think so. See p. 19 of the annual report for y/ending 9/30/08: "The Fund has designated the following as long-term capital gain distributions for its taxable years ended September 30, 2008 and September 30, 2007. Distributions paid from Ordinary income $ — $ — Long-term capital gain $ 23,504,432 $ 22,280,388."

See also the Statement of Changes in the semi-annual report dated 3/31/09, saying that HQL had to date distributed $10,193,502 to shareholders from its net realized capital gains. A footnote explains that "(1) A portion of the distributions from net realized capital gains for the six months ended March 31, 2009 may be deemed a tax return of capital at fiscal year end."

Or check out HQL's schedule showing that the payouts were capital gains. www.hqcm.com/hql_distr...

'G ("You have the right to remain silent. Use it!")

CEF Investors Can't Expect Big Year-End Payouts

Baboon: You're right, this is a case of investor irrationality caused by the way the choice is framed. Other things being equal, should an investor prefer (a) holding 100 shares of a fund that pays a $1/sh year-end taxable dividend and sees NAV & market price drop from $10/sh to $9, or (b) selling 10 shares and keeping 90 shares of a fund that pays no year-end dividend and has a NAV and market price of $10/sh.

I think a lot of folks would prefer (a), even tho in both cases the investor ends up with $100 cash and owns fund shares valued at $900. What's more, the dividend in (a) is fully taxable, while the investor would get to subtract the cost of the 10 shares sold in (b) in figuring gain or loss. The sale may feel like a more "permanent" reduction in ownership than the asset price/sh decrease in (a), even though the dollar amounts are the same.

Bsharvey: CEF's have a "pass-thru" tax regime: Code Sec. 854(b) says dividends paid by CEFs to investors are "qualified" to the extent the investment income of the CEF itself included qualified dividends, i.e. dividends paid by corporations that were taxed on their earnings.

HQH's operating expenses regularly exceed the dividends it receives. HQH is a capital gains play. For example, the 2008 annual report shows $2mm dividend income and $6 mm cost of operations, and the footnotes show that the @ $30mm HQH paid to investors for the year ending 9/30/08 was all treated as long-term gains.

>All of HQL's dividends for the last year have been "ordinary."

Please check the facts. The Statement of Changes to Net Assets in the HQH semi-annual report dated 3/31/09 shows year-to-date distributions of $14.7 million from net realized capital gains. A footnote explains that "A portion of the distributions from net realized capital gains for the six months ended March 31, 2009 may be deemed a tax return of capital at fiscal year end." That is, HQH can't finally characterize this year's distributions until it ends on 9/30/09.

'Gwailo ("Fact-checking is so last year.")

CEF Investors Can't Expect Big Year-End Payouts

This is a good question, and it merits a better answer than "That's the way it is." Here's my understanding of the analysis by Stephen Hamilton, Esq., in his recent article, which is available online at www.drinkerbiddle.com/...

Assume a CEF has a capital loss of $10 in year x1 and a capital gain of $10 in year x2, with all other items break-even. It nothing is paid out in year x2, the loss carryover simply cancels out the gain. But what happens if the CEF pays a year 2 distribution of $10 to its shareholders.

The $10 is a "dividend", as defined byTax Code Sec. 316(a), since it's covered by current ($10) *or* accumulated ($10-$10 = $0)
"Earnings and Profits". ("E&P" is a hybrid of tax and financial accounting concepts -- Code Sec. 312 has the gory details.)

CEFs can't make "return of capital" designations. "RoC" is a residual -- it's what left (if anything) after subtracting out the
"dividends" from the total amount distributed. Here $10 - $10 = $0, so no RoC.

Tax Code Sec. 852(b)(3) says CEF's can designate part or all of a dividend payment as a (long-term) "capital gain dividend", which gets favorable treatment (max 15% rate) on an individual investor's tax return. *However*, the amount that can be so designated is limited to the CEF's own "net capital gain" for the year, *after* subtracting any capital loss carryforwards. In our case, $10 - $10 = $0, so the CEF can't designate any of the $10 payout as a CGD.

Result: The $10 distributed in year x2 is a taxable dividend. It doesn't qualify for any special treatment, so it's "ordinary income", taxable for individual investors at marginal rates up to 35%. Snap! Ouch! The key to understanding the result is that the definition of "dividend" -- current *or* accumulated E&P -- doesn't count the year x1 loss, but that loss does get included when figuring the CEF's "net capital gains" for year x2.

'Gwailo

>"given that tax laws are not logical"

Oh, but they are. Very logical. The logic may be insane, but it's logic nonetheless. 'G

On Sep 07 11:02 AM Gruber wrote:

> While I’m not an accountant and given that tax laws are not logical, since dollars are fungible, why wouldn’t a CEF that realized a capital gain in 2010 write it off against its 2009 capital losses and distribute the amount of capital gains anyway and designate it as a return of capital distribution?
>
> It would seem to me that you’d get the best of both worlds? Remember we’re talking about cash flow and not earnings and profits.

Deutsche Bank's DWS Fund - Temptation by Proxy

Dan - Let's see if I understand your situation:

You have acquired a sizeable position in BIF, which is controlled by Stewart Horejsi and has been trading at a substantial (20%+) discount to net asset value. BIF now looks like a "value trap", because the fund has been sitting on the cash raised by its June '08 rights offering, even tho it yields less than BIF's ongoing cost of leveraging with ARP's, while the management fees that BIF pays Horejsi are many basis points higher than the industry norm. Horejsi-controlled trusts have been selling shares of BTF, another fund he controls, and aggressively buying BIF (now up to @18% ownership), perhaps to thwart any challenge to his control from Ron Olin and Doliver Capital, who own @ 17%.

You would like to profit from having BIF pay a large special dividend or make a tender offer, even if the offer were in-kind so as to exclude smaller shareholders. Horesi does not seem inclined to do what you want. You have been seeking evidence to support your belief that Horejsi has manipulated the price of BIF stock, and you have published several articles on Seeking Alpha with inflammatory headlines that went beyond the facts offered in support. Seeking Alpha's editors removed those articles after complaints from Horejsi -- an act of censorship that I believe was wrong.

"In my opinion, what you have written so far is exceedingly lacking in objectivity. It can be perceived as propaganda. Given that you are an anonymous author it would be particularly important for you to make clear your opinions after researching both DWS and the Horejsi Group who may assign the SRO and SRQ fee streams to its Privately Owned Co-Advisor Companies." - Dan

You are entitled to your opinion, although you seem to have mastered the art of antagonizing potential allies, such as myself.
I have chosen to focus on problems within the DWS fund group, which touch on Horejsi because he has mounted a proxy contest at two of those funds, the wretchedly performing real estate twins SRO and SRQ. Painting Horejsi as a devil does not make the DWS folks into angels. I have given Horejsi folks permission to reprint an article, but have not endorsed his proxy. Instead, as I wrote last May: "Each SRO and SRQ shareholder should make up their own mind about Horejsi's investment skills, and decide whether his self-interest will coincide with theirs." Your research may help them make that decision, and there is no need for me to duplicate your work.

"The current boards of SRO and SRQ proposed a liquidity event, providing their shareholders the opportunity to sell without being subjected to any discount at all.... GF recently conducted a tender offer, another shareholder friendly activity. I don’t see any mention of those positive governance decisions which reflect on conflicts of interest within the investment industry." - Dan re Part I

There was something peculiar about that proposal to kill off SRQ and SRO, a/k/a "liquidity event". Why weren't similar "events" proposed at any other hi-discount DWS fund? As Herzfeld's closed-end fund report saw it: "What puzzles us most is management's motivation to fight [the Trust] so hard. Management is devoting significant legal and proxy expense to fight [the Trust], but if they win, the ultimate outcome gives them no future benefit." My own, unproven guess is that DWS-RREEF bungled the redemption of those funds' Auction Rate preferreds, which magnified last fall's losses, and DWS worries about its liability exposure if internal fund documents were to fall into unfriendly hands. The right to sue DWS for mismanagement would disappear on liquidation, and those potential claims were not priced into "net asset value". (It's just a theory...) As for the New Germany (GF) tender offer you mention -- it was actually forced upon a reluctant fund as the price of settling a class action lawsuit that challenged the Board's refusal to count any votes cast for Phil Goldstein's slate in a proxy contest back in 2005, on the ground that he wasn't "German" enough. See the fund's SC TO-I filing dated 12/21/07 for details.

Finally, a few months ago you asked: "Gwailo, have you ever met any of the people associated with this proxy fight?" Just so the record will be clear, the answer is "no." -'G


On Aug 03 11:06 AM Dan Plettner wrote:

> So Gwailo, are you suggesting that SRO and SRQ Board Efforts to provide liquidity at no discount to NAV would have been bad for shareholders?
>
> Gwailo, do you want to yourself share any comparison between governance at BIF (of the Horejsi Group) with that of DWS?
>
> In my opinion, what you have written so far is exceedingly lacking
> in objectivity. It can be perceived as propaganda. Given that you
> are an anonymous author it would be particularly important for you to make clear your opinions after researching both DWS and the Horejsi Group who may assign the SRO and SRQ fee streams to its Privately Owned Co-Advisor Companies.

A Poor Man's CEF Portfolio That Performs

Investors in CEF's are giving up something valuable: Liquidity. Open-end mutual funds and ETF's (usually) allow investors to cash out at net asset value at any time, but CEF assets are held captive by fund managers. Except for some specialized investment sectors, I'd suggest that the *only* reason to look at closed end funds is to take advantage of the discounts.

SRO, SRQ Update: Becoming More Curious

The rights offering is actually the "poison pill". Here's how it works:

Horejst now owns about 17% of SRQ. As soon as anyone acquires ownership of more than 17%, everyone *except the acquirer* gets to buy more shares very cheaply. (For every share you own now, you could buy 3 more for a penny each. Of course, the net asset value per share would be reduced proportionately.) So if Horejsi buys any more shares, his 17% would automatically be diluted down to about 4%. So he won't (hopes DWS.)

Boulder Growth & Income Reckoning with Questionable Shareholders

Given the history of Stewart Horejsi's takeover of BIF (formerly the US Life Income Fund) by a proxy fight back in January, 2002, all one can say is:
"Pot....Kettle....Blac...