Harvard Loses an Ally in Fund Fight
D3 Family of Funds Opposes College's Liquidation Plan For Closed-End Vehicle
By ANGELA PRUITT
DOW JONES NEWSWIRES
July 19, 2005; Page C13
Harvard College's latest attempt to wring more value out of a closed-end fund has hit a snag.
The D3 Family of Funds, the second-largest shareholder in the Korea Equity Fund after Harvard, has switched sides in the battle over the future of the fund. After initially backing Harvard's proposal to liquidate the fund because its shares have been trading below the value of its underlying portfolio, the D3 Family of Funds said in late June that it now believes shareholders would be better served by keeping the fund going.
"The costs of liquidating the fund, including brokerage commissions, legal, and accounting could eat up at least half the difference between market price" and what is known as its net asset value, said David Nierenberg, president of Nierenberg Investment Management, who runs the D3 Funds. "It seems like an awful lot of work for a relatively small benefit."
Closed-end funds hold pools of securities and trade all day on exchanges like stocks, often at prices higher or lower than the value of their underlying portfolios. Chronic discounts are a source of frustration for many institutional investors, who often pressure fund boards to liquidate or turn the funds into traditional open-end mutual funds that are priced once a day at the net asset value.
Harvard, which owns 29% of the $60 million Korea Equity Fund, has been reducing its positions in closed-end funds for some time and has pushed other country-specific closed-end funds to change investment advisers or implement other structural changes. For example, the college made an unsuccessful attempt last year to have shareholders terminate Deutsche Investment Management Americas Inc., a unit of Deutsche Bank AG, as investment manager of the Korea Fund, another fund focusing on securities in that country. In yet another case, Harvard was allowed to liquidate its holdings in two closed-end China funds managed by Templeton Asset Management Ltd., after a public battle with the firm.
Korea Equity Fund's shares closed on Friday at $7.21 a share on the New York Stock Exchange, 5.75% below its net asset value of $7.65. Yesterday, the shares rose two cents to $7.23 in Big Board composite trading at 4 p.m. The shares are up about 60% over the past year.
Harvard cites poor investment performance, chronic discounts and high expense ratios as grounds for the fund's termination and the dismissal of Nomura Asset Management as the fund's investment manager.
"We believe the fund has outlived its usefulness," Harvard said in a July 7 filing with the Securities and Exchange Commission. "We believe the fund is too small to support a liquid trading of the market." Harvard noted that the fund has consistently underperformed the Korea Composite Stock Price Index and that an exchange-traded fund and American depositary receipts representing Korean stocks could be viable investment alternatives.
The board of the Korea Equity Fund opposes liquidation, pointing to an improved performance over the past five years. "Harvard's objectives conflict with the interests of our shareholders who view the fund as a long-term vehicle for capital appreciation by investing in Korean securities," the fund said in a filing, also on July 7.
The D3 Funds, which have a 7.5% stake in the fund, initially supported Harvard's push for liquidation, saying in a late March filing that the fund was "too small to offer American investors meaningful liquidity."
But Mr. Nierenberg said the funds changed their position because the difference between the fund's share price and its net asset value -- known as the discount -- has narrowed substantially and there is limited upside to liquidation.
Mr. Nierenberg suggested to an independent director of the Korea Equity Fund that it hold a secondary offering that would allow Harvard to sell all of its shares to the public. Such a plan would allow the fund to sell newly created shares to boost assets, while reducing its management costs per share.
This could be "a win-win, allowing Harvard to exit and remaining shareholders to enjoy lower costs," he said, adding that he hasn't yet heard whether the fund will pursue his suggestion. Nomura Asset Management declined to comment. |
