TSC article on closed-end funds trading at discounts
Fund Watch Features: Closed-End Funds Notebook: Latin Liquidation, and Run Your Own Fund
thestreet.com
By Erin Arvedlund
Staff Reporter
9/15/98 5:42 PM ET
Just as closed-end fund buster Ron Olin was pursuing his
open-ending war against Latin America Smaller
Companies Fund (LLF: NYSE), the battle came to an
unexpected end.
Late last Friday, the board of directors quietly said the Latin
America Smaller Companies Fund would liquidate -- that's
right, shut the doors and close up shop. Shareholders will be
asked to vote on the board-approved, management-led
proposal at the next annual meeting, currently scheduled for
February 1999.
It's not too surprising. Latin America Smaller Companies
Fund was a sitting duck, trading at a 29.3% discount to net
asset value as of last Friday. Since the October 1994 IPO of
4 million shares, the fund's total assets have dropped from
$55 million to $20 million. Just in the first half of this year,
the fund's value lost 25.7%.
The only closed-end fund managed by American Express
Asset Management International, Latin America Smaller
Companies Fund was supposed to focus on Latin American
companies with market caps under $500 million. But its
biggest holdings include short-term commercial paper of
General Electric Capital Corp. and an oddly high number
of Latin American blue-chip ADRs, according to April filings
with regulators.
Not only that, but this suffering fund has gone through
several name changes, billed back in November 1994 as
Lehman Brothers Latin America Growth Fund, truncated to
Latin America Growth Fund, then the Latin America Smaller
Companies Fund. Whew! Officials with the fund's
administrators declined to comment.
Will Latin America Smaller Companies Fund be the first of a
line of deeply discounted closed-end country funds to head
for the exits? Possibly, but not necessarily.
"This is one method to take care of a deep discount --
although it's not in their nature for fund managers to
liquidate. They'd rather stay alive, either as an open- or
closed-end fund," says Jack Brown, closed-end fund tracker
for CDA/Weisenberger in Rockville, Md.
Hefty Discounts Dog Closed-End Funds
Fund
Discount Week
Ending 9/11
Pakistan Investment Fund
-35.12
Latin America Smaller Companies
-34.71
Brazil Fund
-34.42
Taiwan Equity Fund
-32.18
Emerging Markets Infrastructure
-30.13
Corporate Renaissance Group Income
-29.74
Jardine Fleming China Region Fund
-29.64
Morgan Stanley Africa Fund
-29.39
Equus II
-29.33
Chile Fund
-29.27
Morgan Stanley India Inv Fund
-29.19
Source: CDA/Weisenberger
Meanwhile, Olin and his shop, Deep Discount Advisors in
Asheville, N.C., apparently scared at least one manager of
Central European Value Fund (CRF:NYSE) literally out of
his seat.
As part of an investor group in the fund, Olin had filed a
termination proposal calling for new advisors at Central
European Value, shares of which have traded at between a
30% and 33% discount in recent weeks, he says. Olin holds
about a 13.7% stake in the fund, or about 807,000 shares.
Did it work? Sort of.
The fund on Monday said Pierre Daviron resigned as the
fund's portfolio manager and is leaving the president's post at
Oppenheimer Capital International, effective
immediately. Elisa Mazen, who, along with Daviron, has
been portfolio manager since the fund's inception on Sept.
30, 1994, will continue to manage the closed-end fund,
which invests in central and eastern Europe and has no
holdings in Russia. A spokesman for Oppenheimer says
Daviron's departure wasn't related to Olin's filing, and that
Mazen is still part of the old advisory group.
"He was looking for someone receptive to open-ending.
Performance was irrelevant to him. This is a personnel
change, and if that resolves the problem for him it would be
much to our benefit," the spokesman quips. Olin wasn't
available for a response.
Who Says You Can't Buy Your Own Fund?
Your own personal investment fund -- run by you and for you.
Sound impossible?
Maybe not for a shareholder in the Preferred Income
Management Fund (PFM:NYSE) who has amassed a 41%
holding in the plain-vanilla bond fund. Stewart Horejsi
claims he wants to juice it up by investing in distressed
equities and change its name to boot.
Horejsi, who runs Brown Welding Supply in Salina, Kan.,
has for the past two years slowly built up a stake in the
closed-end bond fund and has won two out of six board
seats for himself and friend James Duff, formerly of Ford's
(F:NYSE) U.S. Leasing. In filings, he's suggested not only
changing the fund's format but running the fund himself. And
if he gets two more board seats at next April's annual
meeting, he could do just that.
What's Horejsi's motivation? Flaherty & Crumrine, the
$150-million bond fund's managers, can't figure it out.
Flaherty & Crumrine, a Pasadena, Calif.,
money-management firm, runs three closed-end preferred
stock funds with about $600 million in leveraged assets.
"It's out of left field," says Carl Johns, assistant treasurer for
the fund. "He just started buying. Why this fund? We don't
know." But Flaherty & Crumrine aren't sitting around letting
events take their course. They've sent out letters to
shareholders entitled "Warning: You May Receive Proxy
Materials From Director Stewart Horejsi, Who Is Attempting
A Hostile Takeover Of Your Fund."
In the letter, Flaherty & Crumrine say Horejsi "has a tax
problem. His solution is to cut your income to the bone. All
we know for sure is that he wants to cut the income
distributions the fund pays by the maximum amount
possible. Beyond that it is tough to figure out just what
might happen."
Horejsi couldn't be reached for comment at his place of
work, despite four calls, and two attorneys for him declined
to comment. But filings with regulators partly explain his
motivation.
"We want directors who will take our fund where the returns
are best, not just where the fees are," Horejsi wrote in his
own letter to shareholders. "Because Flaherty & Crumrine
collect their fees from managing preferred stocks . . . the
money invested in the fund did not participate in the greatest
bull [stock] market in history." True, but didn't investors
know what they were getting into? Heck, "Preferred Income"
is in the fund's name.
Horejsi said he would scrap high fees for board directors
appointed by the management company; and with $50
million of his own money in the fund, he does have an
interest in seeing the value of the fund increase.
But Horejsi also wants to run the fund himself. It remains to
be seen whether that would really be, as he writes, "in the
interest of all shareholders."
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