Opening a Closed-End Fund

From Ed Shoben: “I know you are interested in closed-end funds, and I share your view that there may sometimes be opportunities in this sector. Buying $1 worth of assets for 80 cents is always an interesting idea.”

A.T.: Seems Ed owns some First Australia Fund (IAF), which he says hasn’t done particularly well. He recently received a proxy statement and noticed that the fund directors (at least those up for election) owned none of the fund. He consequently voted against them and against management on all proposals except ratification of auditors.

“My paranoia did not start,” reports Ed, “until I got a phone call asking me if I had voted. I said yes and she said they hadn’t gotten it yet and thanked me for voting. About a week later, I got a phone message that I needed to call an 800 number and vote my shares. I called and was told that my [negative] vote had not been recorded and I would need to vote again. I said okay and the first question was, ‘Do you want to vote your shares the way the board recommends?’ I said no, and the gentleman said, okay do you want to vote for all directors? I said no. He said do you want to abstain from voting? I said I didn’t think he was phrasing the question very neutrally. He replied that he was just trying to find out what I wanted to do. I then remarked that my recollection was that the three choices for directors were For All, For All Except, and Withhold Approval For All. He said that was right and I asked him to phrase all the questions as they were on the original proxy. Given that one of the proposals was to make it harder to open-end the fund, it seems management here is more concerned with preserving the status quo than with shareholder value (and they ain’t shareholders). I also didn’t care for lobbying in the guise of collecting a vote. Things do get lost in the mail, I realize, but it’s pretty rare.”

A.T.: One way a closed-end fund selling at a discount can rise in value is simply by converting to an open-end fund. That means allowing investors to get out not by selling for whatever pittance they’re offered in the open market – $8, say, when the fund owns $10-a-share of stocks – but, rather, by “redeeming” their shares at full net asset value with the fund company, which sells enough of its holdings to pay you off. Fund managers aren’t thrilled to do that, because if a fund’s been doing poorly, it could mean lots of redemptions, which in turn means less money under management from which to take its sliver.

Good for you for sticking to your guns, Ed. Shareholders rarely win votes against the recommendations of management, in part because we shareholders tend to be lazy about reading proxy statements. But maybe we should try harder.