China Grill - Harvard goes crimson over another Templeton China fund's discount to net asset value
online.wsj.com
Monday, December 2, 2002
By ERIN E. ARVEDLUND
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Harvard Management, the investment arm of Harvard University, wants to slay the Templeton Dragon Fund.
A leading investor in the closed-end fund market, Harvard holds about 16% of Templeton Dragon shares. And it holds a 30.1% stake in another closed-end China fund, Templeton China World. Earlier this fall, Harvard pressed Franklin Templeton (a unit of Franklin Resources) to ask shareholders to vote on converting China World into a different format: an open-end mutual fund. The proposal will be submitted to the fund's annual meeting scheduled for March 14, 2003 and requires a majority of outstanding voting shares to be approved.
In recent filings with regulators, Harvard listed a menu of options it may pursue in seeking to narrow what it alleges is Templeton Dragon's "chronic" discount to net asset value. Harvard said it may pursue several options, including seeking to replace Templeton Asset Management as the fund's adviser, waging a proxy fight, nominating candidates for the fund's board of directors or "other steps Harvard might at the time believe may enhance shareholder value."
In an amended 13-D filing, Harvard also maintains that a recent tender offer didn't help narrow Templeton Dragon's discount. The market's response to the tender offer was "poor" because it was "too limited in size, and priced too low, to provide a significant benefit to shareholders or to have any substantial lasting effect on the fund's discount," the filing says. To be fair to Templeton, the discount today is under 10%, versus the high 20% to mid -30% range in 2000.
Meanwhile, all this prompted a Franklin executive to moan recently that Franklin Templeton Investments may not launch any new country-specific closed-end funds.
Greg Johnson, a member of the office of the president at Franklin Templeton parent Franklin Resources, said activism on the part of "hedge funds or activist (money) managers" has created a problem for firms that manage closed-end funds. He made the comments during a presentation at a Salomon Smith Barney asset management conference in Boston last month.
Unlike open-end mutual funds, which regularly issue new shares and buy them back upon demand, closed-end funds issue a fixed number of shares that trade on an exchange. In many cases, those shares trade at a discount to their net asset value, an issue often exploited by dissident shareholders as a reason to convert the fund to an open-end structure, where shares always trade at NAV.
"It's a real difficult situation because the closed-end format for a country fund in a market that doesn't have liquidity is the right formula," Johnson said. "The problem is discounts, and the easy answer... is to open-end it," he added.
That may end up hurting shareholders more than it benefits them, Johnson contended: "We brought out closed-end country funds because those markets are not ready to have an open-end fund," he explained, and, "In the case of China, we still don't think it's appropriate." But "with the kind of activism we're seeing today, we're going to be hesitant to bring out another" country fund, Johnson said.
Harvard's arguing that the two funds, Templeton China World and Templeton Dragon, are so similar that efforts to narrow the discount on the first should extend naturally to the second fund. Templeton has publicly described Templeton China as Templeton Dragon's "sister fund," and a "mirror" of Templeton China, Harvard contends in its filing.
As for the firm's consideration of Harvard's proposals, "Templeton Dragon's board is made up of a vast majority of independent directors who take their fiduciary responsibilities very seriously," says a Franklin spokeswoman.
For those looking to exploit Harvard's approach, among its other closed-end fund holdings are China Fund, Greater China Fund (run by Baring Asset Management), Brazil Fund, India Fund, Asia Tigers Fund, Korea Fund and Latin America Equity Fund. |
