Closed-End Fund Shareholders Vote for Change Over Fund Managers' Objections

Includes: APF, EEA, FGF, GF, MAY, SGF, SWZ
by: Gwailo

The early returns are in. At this point in the proxy season, shareholders of at least eight closed-end funds have voted for new measures to reduce trading discounts, over the strenuous objections of the fund managers. These proposals are only advisory, not binding, because the State of Maryland, where most CEFs are incorporated, gives shareholders only minimal control over the way their investments are managed. Yet such votes show that pressure for change is building up in the closed-end corner of the investment universe, where equity-oriented funds currently manage just under $100 billion of net assets on behalf of their investors. Here's the list of the votes, in order of the funds' annual meeting dates.

Sunamerica Focused Growth
Sunamerica Focused LargeCap
Swiss Helvetia
M/S Asia-Pacific
European Equity
New Germany

Most funds will only reveal the exact vote counts when they post their next (semi-)annual reports. But we do know, for example, from press releases that 54% of the votes cast at FGF favored a shareholder proposal recommending that the fund promptly self-tender for half of its shares at 98% of asset value.

The proxy ballots at the other seven funds each included a proposal from Walter S. Baer, a Los Angeles investor and former RAND Corporation policy analyst, who was able, under SEC Rule 14a-8, to include them along with management's proposals in each fund's proxy materials. His proposal at FGI, which called for a 50% self-tender at net asset value and for liquidation if more than half the shares were tendered, was approved by a 74% - 26% margin. The other votes took place at international or "single-country" CEFs. Here, Baer proposed to deal with persistent discounts through the use of "interval plans". Such plans, as authorized by Rule 23c-3 under the Investment Company Act, require funds to commit to repeated partial self-tenders at net asset value, such as offering to buy back 10% of their shares every six months. An interval plan aims to cure the loss of value inherent in trading discounts by adding the fund itself as an additional source of demand for its shares, while not compelling it to hold a portfolio which has the same degree of liquidity as an open-end mutual fund, which must stand ready on short notice to repurchase shares whenever investors so request.

What's good for investors is bad for the companies that sponsor and manage CEFs. Their fees are typically set as a percentage of assets under management, and reducing trading discounts generally involves transferring assets out from funds and over to shareholders -- which cuts the fees. That, and the natural reluctance to accept change initiated by outsiders, meant that the proxy statements for all eight funds were stuffed with warnings and strong recommendations against self-tenders and interval plans. We have already seen how the attorneys for one fund (NYSE:SWZ) tried and failed to suppress any vote at all, and have noted the result: the interval plan won, with 9,703,826 votes in favor and 7,661,746 against.

At the Singapore Fund meeting on June 2, the result was not even close. The interval fund proposal won by a 4:1 margin, receiving "favorable votes from 39.3% of the outstanding shares. 9.4% of the outstanding shares voted against the proposal and the remainder of the outstanding shares abstained or failed to vote." The remaining four funds have been rather coy in announcing the results. The folks at Morgan/Stanley, which manages APF and MAY, phrased it this way:

A non-binding stockholder proposal recommending that the Board of Directors of each Fund take the steps necessary to adopt an interval fund structure for each Fund received favorable votes from less than a majority of the outstanding shares of each Fund, and more than a majority of the shares represented at the Meeting for each Fund.

In other words, Mr. Baer's proposals won, even though they didn't get a majority of the outstanding shares because some abstained or just didn't vote at all. As a confession of defeat, this choice of phrase puts M/S in the running for a Hirohito prize: "The war situation has developed not necessarily to Japan's advantage." Their fund manager counterparts at DWS/Deutsche Bank were a little more matter-of-fact about the results at EEA and GF:

The stockholder proposal for EEA and GF asking the Board of each Fund to take the steps necessary to adopt an interval fund structure received a majority of votes cast and will be further considered by each Fund’s Board of Directors. ... ["bis die Hölle zufriert, wie man sagt auf Deutsch."]

What happens next? Time to assign some homework to you, the reader. Here are three key questions to consider when trying to size up the possibilities for successful discount reduction and the chance to make a profit from long-overdue reforms in this corner of the market: Where are the votes against management and for discount reduction coming from? Why is the total vote much less than the total number of shares outstanding? What shareholder votes would be binding, rather than just advisory?

Disclosure: Author is long all but MAY and EEA