Closed-end fund activist Ronald Olin is having the misfortune of getting what he wished for in a unique closed-end fund fight.
Olin - who in April led an unsuccessful proxy fight to fire the adviser of the Portugal Fund - now is opposing the adviser's efforts to open the fund. Olin sought to fire the adviser out of frustration with the chronic discount in the net asset value of the fund's shares. Opening the fund would immediately eliminate the Portugal Fund's discount, which is about 10 percent, according to the mutual fund tracking firm Lipper of Summit, N.J.
Olin, whose investment advisory firm, Deep Discount Advisors of Asheville, N.C., owns nearly one-third of the shares of the Portugal Fund, said, in an Aug. 2 SEC filing, that a 1.5 percent redemption fee that will be imposed on shareholders who redeem within a year and other factors make the proposed opening of the fund a bad deal.
Olin also said in the filing that three of the fund's directors and the fund adviser, Credit Suisse Asset Management of New York, reneged on a "gentlemen's agreement," reached during a July 13 meeting, that both sides would refrain from attacking the other publicly based on statements made during the meeting. Olin told fund executives at the July 13 meeting that he opposed opening the Portugal Fund but favored other measures to reduce the fund's discount, according to regulatory filings.
For its part, Credit Suisse said the proposal to open the fund addresses the discount to net asset value that the fund has suffered since 1990. That persistent discount and increased liquidity in the Portuguese securities markets have made the closed-end fund structure unnecessary for the Portugal Fund, Credit Suisse said in a preliminary proxy statement the fund filed with the SEC on Aug. 20.
A Credit Suisse spokesperson did not return a call seeking comment. Olin declined to comment. Olin's position is outlined in the Aug. 20 Portugal Fund proxy statement and a separate SEC filing by Deep Discount Advisors on Aug. 2.
The Portugal Fund had total net assets of $84.2 million as of July 31, according to Lipper. The fund's performance ranked it eighth among its 12-fund peer group during the past three years, Lipper reported. The fund's total annual return over that period was approximately 16 percent, compared to the average return of approximately 19.5 percent for the peer group, according to Lipper.
Olin is president of Deep Discount Advisors and general partner in Ron Olin Asset Management Co. of Asheville, N.C. Regulatory filings describe the firms as investment advisers which specialize in investing in closed-end funds. The companies manage assets of more than $180 million, according to an April SEC filing.
The Credit Suisse-Olin dispute marks the first time that one of the handful of activist closed-end fund shareholders - a group that historically has agitated to reduce or eliminate net asset value discounts quickly - is opposing a management proposal to open a fund, closed-end fund shareholders, trade group executives and others said. These people were surprised that an activist such as Olin who has waged several proxy campaigns because of discounts would object to opening a fund. Even with the imposition of a redemption fee, Olin would probably gain from a quick opening, they said. In addition, the redemption fee would not apply if Olin took his stake in the form of securities rather than cash, according to the proxy statement.
"Obviously, if (the Portugal Fund) open-ends, you've got a nice 10 percent return," said Dan Navarro, a senior analyst for Wiesenberger, a fund tracking firm in Rockville, Md.
Opening a fund is the only way to quickly eliminate a significant, persistent discount, Navarro said. Tactics such as share repurchases, while they can reduce discounts, will not eliminate them, Navarro said.
Olin has had some success with an alternative strategy, however. He waged a proxy fight and won a board seat on the Clemente Strategic Value Fund in September. The $75 million fund has cut costs and improved performance since the proxy campaign, Olin said. The fund's share price has risen by 72 percent since October, he said. The fund's net asset value discount now is about 10 percent, according to Lipper. That is down from a high of nearly 26 percent in December, 1996.
A restructuring of the Portugal Fund similar to that executed at Clemente Strategic Value is a better alternative than immediate opening, Olin said in the Aug. 2 filing.
Olin may be finding that it sometimes makes sense to keep a fund closed and change its practices rather than open it, said Brian Smith, executive director of the Closed-End Fund Association of Kansas City, Mo.
"I hope that this is ushering in a new era of professional business evaluation" of how activists address closed-end fund discounts, Smith said.
The closed-end fund industry in the past two years has frequently fought proposals to open funds. Closed-end fund executives say that doing so decreases fund assets and causes shareholders to take a tax hit from capital gains which are realized as the fund sells off securities to meet redemptions.
In a September, 1998 study, Wiesenberger concluded that closed-end fund shareholders usually suffered after funds open. Shareholders in a newly-opened fund usually face substantial unrealized capital gains and are forced to bear a greater percentage of the expenses as assets shrink, according to Wiesenberger. Wiesenberger and Securities Data Publishing, publisher of Mutual Fund Market News, are divisions of Thomson Financial Services. The Portugal Fund has about $19 million in unrealized capital gains, Navarro said.
Olin said he was concerned about expenses the Portugal Fund is likely to incur if it opens. If the fund opens, there probably will not be sufficient assets in the fund to keep it in business, he said in the Aug. 2 filing.
In an April 19 proxy filing, Olin urged Portugal Fund shareholders to take a variety of steps short of opening the fund to reduce the net asset value discount. Among them, Olin sought to have himself and a colleague elected to the fund's board of directors and urged adoption of a resolution calling for repurchases of fund shares. The fund cancelled the scheduled May 11 meeting before shareholders could vote on Olin's proposals.
