Investing With The Alpha Bulldog - An Interview With Hedge Fund Activist Phillip Goldstein Of Bulldog Investors

Includes: ETJ, SVVC, ZTR
by: Michael J. Ray

Finding closed end funds (CEFs) that are worthy of investment can be difficult. It's not an easy process as there is so much data to analyze. Looking at a fund's holdings, yield, sources of income, current management styles, and price compared to net asset value (NAV) are just some of the many factors that must be analyzed. What is often overlooked is to see if there is any investor activism present. This is an important additional factor to take into account with any investment in a closed-end fund.

When talking about CEFs and investor activism, one has to look no further than the legendary Phillip Goldstein of Bulldog Investors. Mr. Goldstein is a hedge fund manager and an activist investor, and let me say that his fund is properly named. Bulldog has a history of being a tenacious investing entity. The fund has a history of engaging in and winning proxy battles. In many instances the mere threat of activism by Mr. Goldstein and Bulldog is enough to effect desired changes. I have followed Mr. Goldstein for some time, and I will often take positions in CEFs that Bulldog Investors are active in. Currently I hold three CEFs based upon Bulldog's current activism. These funds are Eaton Vance Risk-Managed Diversified Equity Income Fund (NYSE:ETJ), Zweig Total Return Fund (NYSE:ZTR), and Firsthand Technology Value Fund (NASDAQ:SVVC).

Recently I had the opportunity to speak with Mr. Goldstein about these CEFs as well as some of his and Bulldog Investors' other investments. Below is the interview in its entirety, conducted on Friday, June 7, 2013.

Michael - You have an interesting background in that you had a 25-year career as a civil engineer for the City of New York before becoming a full-time investment professional. Could you fill us in a little on the back story behind this dramatic career shift?

Phillip Goldstein - It's an interesting story, so I'll try to give you a fairly short version. I was always a pretty good individual investor, you know, a value investor. Of course this way of investing in CEFs has nothing to do with activism, but it was very simple to me. If you know the market price of a CEF, if it's a big spread between that and NAV it's probably a pretty good buy. So I had done pretty well just investing basically in that kind of regression to the mean, buying when discounts are wide and selling them when they narrowed up.

On my own I was working as an engineer, as you said. I then met my business partner, Steve Samuels, at a conference on closed end funds back in 1989 and we spoke for about 15 to 20 minutes. I was in New York and he was in California. We connected again in 1992 after Barron's did a story on CEFs and I wrote a letter to the editor that was published. Somehow, he tracked me down. After we got to know each other he thought I was a pretty bright guy and he said, "Did you ever think about managing money?"

I said that I thought about it, but I don't know anybody with any money. All I know are civil servants. I was managing only my own money and my dad's money. So he said, "Let me see if I can get you a client." He got me one client; I think he opened an account for $100,000. He had a couple more. I was still working for the city and it was a lot of work. I was doing everything including preparing the Schedule D's.

Anyway, after a while I said that this is too much work. I was working from morning to night, so one day I asked him, "Why don't we just start a fund?" So at the end of the year in 1992 we started a fund. I stayed with the City a few more months, making about $55,000 and I left the following year. I still remember saying to him, "Gee, if we do well, you think I could leave my job?" He said "Oh, I think so." So that was a long time ago.

Michael - Moving along to closed end funds, most retail investors tend to think of CEFs as being rather boring investments. However, your management firm at Bulldog takes an entirely different approach on investing in CEFs and actually sees some funds as being ripe for shareholder activism to unlock their true value. Do you find lots of opportunity in the CEF investment universe, and what is your firm looking for, specifically, when trying to identify a potential CEF investment?

Phillip Goldstein - Well, we do find a lot of opportunities, but like any asset class, it ebbs and flows. There was a time when we found REITS [real estate investment trusts] very attractive in the early 2000's when they were trading way below liquidation value. We generally like asset plays. With closed end funds, there's always going to be some opportunities for activism. We actually didn't start out being activists. You need some money to be an effective activist; otherwise you're just kind of like a gadfly. You can have some effect but not much. You know there's a big difference between when a guy calls up a company and he has 1,000 shares, and when Carl Icahn calls. I think they pay more attention to Carl Icahn.

I think we had about $40 million dollars under management in 1996, and that's when I decided to take a more activist approach. It suits my nature, too. There are always opportunities, but at certain times there are more than others. The discounts in CEFs are now so-so. I mean, some of today's funds have discounts that are not that great, but the chances of success are higher. Back in the 70s and 80s, you would see funds that had 25% discounts, like plain vanilla S&P 500 funds, but there was no activism. Now there is activism and there is a core group of folks that follow us into these funds. If you sit around and wait for a 20% discount, there's going to be very slim pickings, with some rare exceptions.

So there are opportunities out there. In fact there's a fund that we own, I'm not going to tell you what it is, but we expect to make a filing pretty soon. We're very close to 5% on it. What we look for is No. 1, there's got to be a discount, right? I mean there's no sense being an activist in a closed end fund unless you have a discount that you think you can get some alpha from. There are activists who will try to take over the fund, they're rare. They have a ton of money and they want the management contract, but that's pretty rare. We can't do that because it's our own investors' money. So it wouldn't be ethical to use their money to try to take over a fund without delivering value to the folks who put up the capital. So the primary thing is the discount. There's got to be a discount.

The second thing is the shareholder base. You know, are we likely to win if we have to run a proxy fight at the end of the day? Then the other issues are, what is the management like? Are they likely to fight? Are they reasonable? Are they good guys? Do they actually care about shareholders or just about themselves? Then you need to know the anti-takeover provisions. How difficult is it going to be if you have to go to the mat?

That's kind of it in a nutshell. Not much different from what any activist looks for, except that with the closed ends there are some other little quirks, e.g., you can fire the manager even if the board does not.

Michael - One example of a CEF that your firm is invested in is the Eaton Vance Risk-Managed Diversified Equity Income Fund . I know that your firm controls more than 8% of the fund and it is one of your largest holdings. I also know that you have been very active in getting ETJ's management to address the deep discount to net asset value that the shares traded at. It seems that ETJ enacted most of your recommendations, including enacting a plan to buy back up to 10% of the outstanding shares, and pay a monthly dividend rather than a quarterly one. Do you feel that these plans are working and are you still comfortable with this investment?

Phillip Goldstein - Well that's a good question. Look, I think regardless of whether it does the job, it has helped some. I mean, when we first started buying it, I think the discount to NAV was close to 15%. It's difficult to know how much is due to our efforts, but it's narrowed. Let's say today, my guess is it's at about a 10% discount. It closed up pretty good today [6/7/2013], so let's say it's 10%. How much of that is due to those initiatives and how much is just due to market moves or the sector narrowing up, it's difficult to know. But they have been buying shares, so that's at least accretive to NAV. My sense from speaking to them is they seem to be sincere. They have accepted our suggestions. We gave some very modest suggestions about the buyback program and also going to a monthly dividend. I'm not totally satisfied with the way the discount has worked out up to this point. So you know, I don't want to give a deadline, but I think it's a fairly short period of time before we ask for something more, and they know this.

So, I think as an activist our approach is we want to give the managements that are cooperative and trying to work with you more slack than the people who basically tell you no. So you want to reward good people and punish the bad ones. So it's kind of in that no man's land now, ETJ. It's a big fund, so it wouldn't be so easy to engage in a proxy fight. It would be time consuming and expensive. Also we are not certain that we could prevail in a proxy fight. It would be negative for them as well, so it's a good reason for them to cooperate. I think they value their reputation. They want to come out with probably more investment products, so I don't think they want to get into a publicized battle. So we're dealing with them in a civil way, but that does not mean we're going just sit here forever. At some point (certainly this year) if the discount doesn't narrow, I think we're going ask them to do something more. You could probably guess what that is.

Michael - Another CEF that Bulldog is heavily involved in is the Zweig Total Return Fund . Unlike ETJ, ZTR seem to hold a sizeable cash position, but their top equity holding in the fund is Apple (NASDAQ:AAPL) at 4.4% of the total portfolio. The fund, though, still seems to trade at a deep discount to net asset value . The board of ZTR has attempted to address this issue by having open-market stock repurchases, but that has not seemed to help much. Since the fund holds large amounts of cash and AAPL stock, do you still feel there is still value to be had in ZTR? Also what further steps might your firm take with this investment?

Phillip Goldstein - It's actually pretty similar in the approach we're taking with ETJ. You know, I think they have a pretty good management, and they value their reputation. We had one conversation with them. We didn't push them too hard. I think we're in a very similar position with ETJ. I think it's come to the time where you can say that it's not working. I don't think they've been as aggressive on the buyback as ETJ. I think our strategy going forward is to push a little more. In connection with that, I don't know if you saw it but another shareholder, who has a very large position of almost 5%, filed a letter a couple days ago calling for similar steps to be taken. It was Karpus Asset Management and they own 4.8%. It's a short letter, but it basically says, "You should do something." So I think that sets the stage for us. We're not working together, but I think our objectives are the same and we will probably go back to the board or management and ask them to do something more meaningful. I think it's very similar to ETJ. Not bad people, but, you know, it's not there yet.

Michael - One of your more involved investments is Firsthand Technology Value Fund . I'm curious as to what you see in this fund, as it seems to be broken: it is trading at a 17% discount to NAV. SVVC, as of April 30, 2013, had estimated gross assets of $204 million, or $23.86 per share, including cash of approximately $15.02 per share. The top actual holdings at that time, besides cash, were Twitter [private] and Facebook (NASDAQ:FB). Twitter does not actually trade on the open market yet, and the FB holding represented about 8% of the total fund's assets. What value do you see in SVVC, and what do you see as the shortcomings of present management?

Phillip Goldstein - Well, it's hard to know where to begin, but I think the main impediment is Kevin Landis, the fund's manager. Unfortunately, in my opinion he is a terrible money manager. As for what I see in it, it is the same thing you must have seen. It's an undervalued stock. The current manager doesn't seem to care at all about enhancing the value. We asked him to do a share buyback. You say it's at a 17% discount to NAV, but I think it's actually a little wider.

We see a fund with a pile of cash and exorbitant fees. I mean Kevin is getting 2%. So 2% on $200 million dollars is $4 million dollars a year. In a way, I'm happy Mr. Landis not investing the cash. I'd rather have him not invest it because he's not an effective money manager. So what we have is a cheap stock. It's kind of a no brainer to buy in your own shares at a wide discount, but he refuses to do it. I think he lost over 80% of the fund's asset value over a 13 year period, and that's pretty awful.

The second problem is that the fund's current investment thesis is flawed. I mean the idea that you're going buy these tech companies in the secondary market without knowing anything about their financials and hope that you're going get a pop when the IPO comes is simply not a good strategy. Yeah, it might work sometimes. I mean, look, maybe he'll get lucky if Twitter has an IPO and really pops, you know, but it's just dumb luck. To me it's like buying a lottery ticket. You don't need to pay a manager 2 and 20 to do that.

With these companies, when they're private, you have no access to their financials. Now, I'm not talking about a real venture capitalist, where you actually have some influence and control over management or upon the board, you know what you're getting into and actually getting your hands dirty. SVVC's management is just buying shares like a FB pre-IPO for example. We could have bought those, too. They're from Facebook employees who wanted to cash out, but how do you know what they're worth? There's no way to know what they're worth when they're private.

So [with SVVC] you've got a questionable money manager with a flawed investment strategy. We also have a big discount. The last thing that is extremely important is a shareholder base that is chomping at the bit to make a change. There's no doubt in my mind that if we had run a director at this year's meeting we would have gotten elected. Did you even see the voting results? Well, they published it in an 8K which you can look at. It seems that 32% of the outstanding shares were voted against the director who was nominated by management. I cannot imagine who would vote for Landis. Who's happy?

You know, if you think about SVVC, if you're a long time shareholder you've lost a significant amount of your investment, so you're not happy. The fund did a secondary last year, pre-Facebook, when the stock popped at $27.00. So anybody who bought then and still holds it is not happy. And then you've got the folks who bought it like we did after the stock collapsed and went to a big discount. We probably started buying it at about a 25% discount or more, and those people are like us. I mean they just see a big discount and they want it narrowed.

I could be wrong, but I think I'm pretty good at analyzing our chances of success in a proxy fight. I just can't imagine why anybody would vote against us. Where is the support for current management going to come from? Who's happy about the status quo? Now there may be a few people who just think this is their chance to get Twitter, but I don't think there's too many. I think the people who thought that about FB and bought it pre-IPO got burned. I don't think there are too many more investors counting on current management to make them money. So I think we're in a great position. It's just a question of time.

Michael - In a recent letter to the board of SVVC you have called for Kevin Landis' removal. In the letter you describe Mr. Landis' long-term performance as "abysmal" and have called for the board to replace him. Have you received any feedback on your proposals from either Mr. Landis or the board, since issuing this letter?

Phillip Goldstein - Absolutely none. I think he's gone into the bunker. I have not seen any response. A number of journalists have called me and asked, "Why don't you call Kevin Landis?" I mean, he's just simply not responding. I've seen him on CNBC, but he just comes on and he says nothing. CNBC has him on as some kind of expert on tech stocks. Why don't they just ask him how his performance has been? I don't get it.

Michael - From SEC filings it seems that your firm is in control of approximately 838,882 shares of SVVC, which calculates to over 9% of the total outstanding shares of the fund. If Mr. Landis or the board fails to act in any meaningful way, what would be the logical next step to take for you and the shareholders you represent?

Phillip Goldstein - Yeah, we're up to about 9.8%. We're just under 10%. Well, I'm not going give specifics but there are a number of options. I'm not going to telegraph our next move because I assume that Kevin Landis reads this stuff. I mean, look, the worst case is we have to wait until the meeting next spring to oust him. I would like to do things before then. I've been talking to other investors. You just have to stay tuned, you know, but it's highly likely that there are going to be developments before next year.

I mean what is Mr. Landis going to do, just sit around and wait? I told him that he's playing a very dangerous game. He is making $4 million a year. One would think that if maybe if he did something to address the discount, he'd only make $3 million dollars a year, but he has refused to do anything. But we have options. There are things going on, not with him but with other interested parties.

Michael - If you are successful in replacing SVVC's management, what are the first actions you would like to see enacted by the new management?

Phillip Goldstein - Well let me say Mr. Landis considers himself a tech genius. I recently opened a brokerage account for my grandson, who is 11 years old. I gave him $200 so he bought two shares of Tesla (NASDAQ:TSLA) at $56. So that stock is at $102 now. So number one, maybe I should replace Kevin Landis with my grandson [joking]. Why didn't Landis buy Tesla?

I don't pretend to know what tech stocks are going to go up. I can't figure them out, but seriously, what would new management do if we got control of the board?

First thing you do is you offer a liquidity event. You know, do a self-tender or sizeable self-tender offer to return cash. The other possibility would be a sizeable cash dividend. I like the self-tender offer better because that allows people the freedom to tender or not, depending on what you do with the fund afterwards. Some people may elect to stay with it and not tender. I think the self-tender is probably the fairest best way to go, at a narrow discount to NAV. Let's say like 2% discount to NAV.

Michael -Did you have anything for me or any last comments you'd like to make, Mr. Goldstein?

Phillip Goldstein - Let me think. Let me tell you, there's something you just mentioned dealing with closed end funds. I think that you said at the beginning they're kind of dull, and in a way you're right. They are never going to be the top performer in one year. With our strategy of using closed end funds and activism, it does generate positive alpha. If you look at our performance over 20 years, and on a net basis to investors, we've outperformed the market by over 4% per year. This is pretty sizeable, and with less volatility. We have only had one down year out of 20. So I think that this strategy, that is our fundamental strategy, has passed the test of time through good and bad markets alike. If the goal of investing is to outperform the markets on a risk-adjusted basis, I think we have demonstrated that this works.

Mike, I think you can see how it works because you're obviously following us and you know some of the positions we're in. It may not have the excitement of someone who says "I want a ten bagger." That's never going to happen with a closed end fund. Instead of getting a ten bagger or grand slam home run, you're going to get a lot of singles, doubles and triples. If you can keep chipping away at that, it's a very good way to outperform the market on a risk-adjusted basis. If you can get activism into the mix, I think we have shown that that's a good way to invest over the long term.

Final Thoughts

First, I would like to once again thank Mr. Goldstein for taking the time to participate in this interview. He answered every question in a thoughtful manner and was very generous with his time. Finally, I would like to make it clear that I was not compensated by Bulldog Investors or anyone else to compose this article. I am a simple shareholder in several CEFs, a contributor to Seeking Alpha, and nothing more. My intent here is straightforward, and that is to gather as much information as I can for myself and those interested in closed-end funds.

Disclosure: I am long ZTR, ETJ, SVVC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.