Sam, Rights offerings are a scam that CEF mgt. firms use to get more assets under management (they are paid on a pct. of total assets, after all. Heaven forbid they should grow those assets. -g- ). Basically, they come out with deals that "allow" current shareholders to buy new shares under the market or NAV price, whichever is lower. You get to buy so many according to how many you already own, and many offerings allow you to buy more in certain situations (oversubscribing, they call it). Also, many rights are traded as securities themselves on the NYSE. All of this sounds good except for several wee problems:
1. You cannot create something out of nothing. The only asset is the fund's portfolio, so, if shares are being offered below market price, it means current shares are being diluted.
2. There are costs associated with making a rights offering, including legal, mailing, and publicity. These range from 2 pct. of NAV for the most efficient, such as Royce, to about 7 pct. for the ones who pay off brokers to tout the offerings, such as Morgan Stanley.
3. Your losses are not limited to just the 2-7 pct. ripoff. You are also treated to the fact that if the rights trade publically, and most do, traders buy the rights and short the CEF for the interest rebate, depressing prices more.
4. Also, shareholders know that rights offerings are screwjobs, so they bail out, widening the discount even after the deal. It sometimes takes years for a new generation to come along to buy the shares without knowing they are about to be raped.
Yes, Morgan Stanley is one of the worst sinners in the rights offerings field, which means that most of their funds, though well managed, carry deeper discouts than they should. Daiwa and Nomura are not above picking shareholder pockets, but they are not as active in this area as Morgan.
Why the SEC allows this criminal activity to continue amazes me. If you ask for an additional .0005 pct. in management fees if you beat the market, they grill you like you are a Columbian drug dealer. But steal 7 pct. from shareholders in one swell foop and they give their blessings. MB |
