Joe Eqcome

Make Money with Closed-End Fund Activism

OOOpps,

The hyperlink to the first study was cut off for some reason in my comment above. I think this one might work.

finance.wharton.upenn.edu/~itayg/Files/cefactiv...

If that doesn't work, you can go to my website and look under the tab "Academic Papers" where you can find it.

Sorry for the inconvenience.

Joe Eqcome

Make Money with Closed-End Fund Activism

Gwailo

Thank you for your invitation to extend your analysis with reference to “activist” investing in CEFs. It’s a great article; interesting question.

I’ve hyperlink the following articles that address the issue on both ends of the spectrum.

The first one is: Activist Arbitrage: A Study of Open-Ending Attempts of Closed-End Funds.” from Duke. finance.wharton.upenn.edu/~itayg/Files/cefactiv...

The authors content that CEF discounts attract activist arbitrageurs, but these discounts shrink in anticipation of an activist arbitrageurs’ attack.

Importantly, the ability of the activist to ultimately close the gap between the price and NAV is the CEF’s governance. While you might be able to “rattle the cage” and get some concessions from current management—like a tender offer at a lower discount, replacing the management of CEF at the board level is a proxy issue and the activist investors should be willing to take this on. The authors go on to observe that the 1992 proxy law reform gave outsiders additional flexibility to wage proxy contests.

The other article is: “The Use of Tender Offers to Address Closed-End Fund Discounts.” www.claymore.com/docs/...

This is a non-academic article that might have some bias as it was written by the folks at Claymore who sponsor CEFs. Their study suggests that while the tendering of shares, as a way to fend off “activists”, might be productive both before and after the tender offer, the median change after one year was a negative 1.5% “returning the fund to where they started.

They go on to conclude: “However, even if effective (the tender offer), it frequently introduces the negative effect of a higher expense ratio and less liquidity. Furthermore, the discount is rarely eliminated and occasionally, it even widens.

So, is following an “activist” CEF investor(s) a smart strategy? If such investors are well-capitalized and willing to take on a proxy fight to remove the present management and liquidate or convert the CEF to an open end fund, the answer may be yes.

If the CEF governance is too onerous, then maybe this is just “greenmail” attempt. At best it’s a short term trade, or, at worst, you’re being played by such activist investors as their exit strategy is based on you bidding up the price of the shares.

Another activist group that's worthy of mention is Horejsi Group with interest in BIF, BTF, DNY where they are actually the managers. The also are involved in a proxy fights with SRO and SRQ.

It’s an interesting topic. Thanks for your thoughts.

Joe Eqcome

CEFs Continued to Outpace the Market in January

Mavericks,

You're right about the greater number of CEFs in those groups being at premiums. Of the 201 CEFs in those categories, 25 were at premiums at the end of 2008 vs only 9 at the end of 2007.

Of the four categories, the average discount for Loan Funds declined (5.1% vs 9.9%) while the average discount widened for the other categories.

Of the Loan Funds EFT, JFR and PFL went from discounts at the end of '07 to slight premiums at the end of '08. Don't know if that qualifies them as sells?

Joe Eqcome


On Feb 03 11:25 PM mavericks wrote:

> CEF's have been on a ROLL!! If they are the canary in a coal mine,
> the market is due to take off. If not, CEF's are in bubble mode.
> I've NEVER seen so many CEF's at premiums, particularily high yield,
> preferred stock, loan participation and munis.