With U.S. Markets looking a bit frothy, we thought it would be interesting to look abroad for potential value. We came across five closed end funds trading at a discount with activist activity creating potential catalysts:
|Fund||Discount to NAV||Activism Summary|
|Taiwan Fund (NYSE:TWN)||15%||City of London, which owns ~ 40% successfully campaigned for buybacks. Lazard also owns ~22%|
|Swiss Helvetia Fund (NYSE:SWZ)||11%||Bulldog Investors owns ~7% and is submitting proposals to amend bylaws , and conduct self tender offer.|
|New Ireland Fund, Inc. (NYSE:IRL)||9%||Karpus Management owns ~16% and may engage with management in future.|
|JP Morgan China Region Fund's(NYSE:JFC)||6%||Will submit liquidation proposal at next shareholder meeting. City of London owns ~32%.|
|Korea Equity Fund(NYSE:KEF)||5%||Bulldog Investors owns ~14% has been adding shares, and suggested a liquidation is likely, but there is not a formal plan yet.|
Source: CEF Tracker's Activism Database
The Taiwan Fund invests in Taiwan (or Chinese Taipei if you prefer) listed equities, and trades at an attractive 15% discount. The City of London Investment Fund owns 40% and Lazard owns 22%. The Fund has responded well to activists and implemented a share buyback plan to close the discount. City of London switched from a 13D to a 13G, apparently in response to the Fund's repurchase plan. Given this catalyst, we can reasonably expect this discount to close further over the course of the next year. Taiwan emerged from a recession in 2016Q1, and has now had 3 quarters of accelerating GDP growth. As Long/Short Investments has pointed out, Taiwan's equity markets are volatile partially due to its dependence on the mainland Chinese economy, but its "New Southbound Policy" is helping it diversify.
Swiss Helvetia Fund trades at an 11% discount to NAV. Bulldog Investors, who currently owns about 7.8% of SWZ's shares, has been involved with the Fund on and off for several years. According to the most recent 13D filing, Bulldog Investors will submit a proposal at the next shareholder meeting, calling for the Fund to amend its bylaws, and conduct a self-tender offer. George Spritzer, CFA previously pointed out the potential long term value in SWZ. The iShares MSCI Switzerland Capped ETF (NYSEARCA:EWL), could offer some similar exposure at a lower expense ratio, but without the attractive discount. The Swiss economy is relatively stable and resilient, and has had a consistently low unemployment rate.
New Ireland Fund, Inc. trades at an 8% discount. Karpus Management owns over 16% of its shares, and may interact with management in the future, although it hasn't yet. Brexit presents major long term risks for Ireland, but since 2015, its economy has been rebounding much better than the rest of Europe. Indeed, most recent GDP numbers (5.2% annual growth), have exceeded official forecasts. US corporate investment, and exports have been key to driving its growth. With an open economy and favorable tax rate, it's likely this trend will continue.
JPMorgan China Region Fund's benchmarks include the MSCI Golden Dragon Index (80%), and the CSI 300 Index (20%). The Board of Directors has announced a plan to submit a liquidation proposal to shareholders at the next meeting on May 11, 2017. City of London Investment Fund owns about 30% of the JPMorgan China Region Fund, and it has switched from a 13/D (activist) to 13G (passive) on March 8, and has trimmed its position a bit. Over the past year, the NAV growth has underperformed the benchmark, but investors have received a better return due to the close of the discount. A 5% discount remains. Investors are likely to get close to NAV in a liquidation (adjusting for any cost of getting funds out of China). China faces significant macroeconomic risks, and some very smart global macro fund managers are shorting the Chinese market. Therefore, the discount may not be enough to justify the risk of a major decline in the market prior to the completion of liquidation. Alternatively, one may be able to create an arbitrage by shorting a combination of the iShares MSCI China ETF (MCHI), the iShares China Large-Cap ETF (FXI), and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), and buying JFC.
The Korea Equity Fund trades at a 5% discount. Bulldog Investors owns ~14%, and has been acquiring more shares, and stated in filings that they believe the fund is likely to be liquidated. However, the Fund has not yet release formal plans for a liquidation. Political risk in South Korea is heightened due to the impeachment of its president in a scandal engulfing a large number of the business and government elite. The Bank of Korea is forecasting 2.5% growth in 2017. South Korea depends on China and the U.S. for 40% of its exports.
Overall, TWN, SWZ, and IRL trade at what seem like unreasonably steep discounts. TWN has responded well to activists so far, and is working to close the discount. SWZ management's best option to conduct a tender offer to fend off further action from Bulldog Investors. Activists haven't yet enacted much change in IRL yet, but the fund does present the opportunity to gain discounted exposure to a quickly recovering economy. KEF and JFC don't look quite cheap enough to create a favorable risk/reward, especially given the macroeconomic and geopolitical risks (although buying a basket of stocks at a discount has advantages if one takes a different macro view). However, the imminent liquidation in JFC potential liquidation in KEF may create opportunities in the near future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.