Deutsche Bank's GCS: Expect Near Term Liquidity at Full NAV

Includes: DB, DJP-OLD, GCS, SRO, SRQ
by: Dan Plettner

Many see open-ending or liquidations as the “Holy Grail” in Closed End Fund (“CEF”) investing. While I’ve discovered many other ways to exceed market returns with CEFs, I will acknowledge that discounts among CEFs are only attractive to investors if they are going to improve. There are plentiful reasons to pass up a fund trading at a 30%+ discount, or to purchase a fund trading at a lesser discount. Whether enabling the anticipation of a liquidation or market relevant governance choices, I believe investigative research into Closed-End Funds is a worthwhile exercise; the movements of discounts are not random.

I expect Deutsche Bank’s DWS Enhanced Commodity Strategy Fund (GCS) shareholders to achieve a long-overdue liquidity event at full NAV in the coming months. April 23rd is the record date for shareholder eligibility at the late June annual stockholder meeting. As of the April 7 close, NAV is $9.20 and market price is only $8.47. Closing of the 73 cent spread could represent an 8.62% return “kick”. That “kick” would augment (positive or negative) NAV return, and in theory is most desirable with the shortest possible holding period. GCS’ NAV is published every evening with mutual fund symbol XGCSX.

Why I anticipate Near Term Liquidity Event at NAV
GCS now invests in an alternate asset class to the equities indicated in its own prospectus, a glaring liability risk to Deutsche Bank (NYSE:DB), DWS, and the underwriters of relevant insurance (ie: “Errors And Omissions”). Deutsche Bank and DWS have not yet provided liquidity at NAV to shareholders for whom the alternate asset class is unsuitable. Unwilling clients of Deutsche Bank’s investment management teams were not even granted the opportunity to vote on the change. In fact, shareholders have not been supportive of Deutsche Bank or DWS generally. At the last annual meeting (in 2008), shareholders voted in favor of Western Investment’s alternate slate of Board Nominees by a margin of nearly 2:1.

To date, Deutsche Bank and DWS have appeared solely focused on harming Activist Shareholder Western Investment among all other shareholders in effort to protect DWS’ fee revenues on several additional funds. Using clients’ money and entrenching on shareholder rights to further Deutsche Bank and DWS’ agenda has been deplorable, disgusting, and simply wrong in my observation. Proxy Advisory Firms (if not it Deutsche Bank’s pocket) would have to be incompetent to ignore Deutsche Bank and DWS’ misdeeds. Those interested can read SEC Director Andrew Donohue’s 2009 Keynote Address at the Independent Directors Council Investment Company Directors Conference, and compare to the GCS' recent governance actions.

Moral judgments of past transgressions are irrelevant to my liquidity thesis. Timing is relevant. In my humble opinion, Deutsche Bank and DWS have already maximized the duration and magnitude of pain they can tenably inflict on shareholders. I am not expressing excitement for any “value” that management could or should be creating by managing an underlying portfolio. If there were no captivity, I would be selling my shares at NAV. I’m primarily a retirement account investor and can’t hedge the new straight commodity risk by shorting DJP, as might a hedge fund manager.

Alternate Paths for Liquidity at NAV
I believe Deutsche Bank and DWS are likely to propose merging GCS into A-shares of its now virtually identical mutual fund, SKNRX. Shareholders would have the opportunity to sell at full NAV or exchange among any A-shares at DWS without penalty. When I say “virtually identical”, please allow me to be more specific. SKNRX investors (unlike those of GCS) have an applicable prospectus (.pdf) and daily choices at NAV.

If Deutsche Bank and DWS fail to provide liquidity at full NAV, they would not only be choosing extensive liability for losses caused by investing in a different asset class than the GCS prospectus dictates , Deutsche Bank and DWS would again badly fail in reelecting their entrenched board. Whether GCS is forced by Maryland Law into liquidation after a 2nd consecutive failed election, or shareholders elect Western Investment’s Board, the primary variation in effect is to the duration for which Deutsche Bank and DWS accumulate liability for any capital losses in a frequently unsuitable asset class. Obviously, these are statements of my opinion and my expectations. There is risk to everything I perceive as I do not have a crystal ball.

Disclosure: Long GCS