A proxy battle is developing between fund executives and shareholder activists over who should become the new investment manager of the $105 million closed-end Mentor Income Fund.
The two sides are at odds over the pending sale of the fund's advisory contract to U.S. Banks' First American Asset Management unit. The fund is currently managed by Mentor Investment Advisors of Richmond, Va., a unit of First Union Corp. in Charlotte, N.C. The agreement to sell certain of Mentor's assets to U.S. Bank of Minneapolis, a division of U.S. Bancorp also of Minneapolis, was announced July 7. Terms of the deal were not disclosed.
Mentor had been created through a partnership between Everen Securities of Chicago and Wheat First Butcher Singer of Richmond, both of which First Union had acquired.
First Union had decided to concentrate its asset management efforts on open-end funds, according to a proxy statement filed July 20 by Mentor on behalf of the closed-end Mentor Income Fund. Mentor Investment Advisors, the First Union subsidiary, manages only this and one other closed-end fund.
Consequently, First Union made an arrangement to sell the fund's management contract to U.S. Bank, which already manages 11 other closed-end funds with combined assets of $1.5 billion in its First American Asset Management Unit.
While the deal may be a good one for both First Union and U.S. Bank, it is not such a bargain for the fund investors, said closed-end fund shareholder activist George Karpus, president and CEO of Karpus Investment Management of Pittsford, N.Y. in a competing proxy filed with the SEC Sept. 6. Karpus owns more than 547,000 shares, or about 4.6 percent, of the fund on behalf of himself and his clients.
In his proxy, Karpus estimates that the fund's management contract was sold to U.S. Bank for roughly $3 million, while fund investors are coping with a persistent 10 to 12 percent discount which continues to plague the fund.
"Mentor is receiving large compensation, U.S. Bank will receive a steady stream of fee revenues, and the shareholders will not receive meaningful economic benefit," said Karpus in a statement released by his firm.
Much of the financial burden arising from the sale of the fund's management contract to U.S. Bank will fall on shareholders, said Karpus in his proxy. That burden includes the cost of changing the fund's state and articles of incorporation. Investors will also bear the cost of changing the name of the fund to the American Income Fund, Karpus said.
The fund's poor performance coupled with its discount means investors are losing, said Karpus. Year-to-date through Aug. 31, the fund has returned 4.64 percent, according to Wiesenberger/Thomson Financial.
In his proxy, Karpus took the unusual step of proposing that fund shareholders vote against installing U.S. Bank's First American Asset Management unit as the new fund adviser and instead vote to install Karpus Investment Management as the adviser. This is only the second time Karpus has sought to have his firm be awarded a closed-end fund advisory contract through a proxy filing. But in the one previous case, Karpus had a change of heart and later took his firm out of the running for adviser.
Karpus said in his proxy that if his firm is elected as the fund's new adviser, the annual management fee will be based upon the lower of the fund's net asset value or the market price. That means that if the fund is trading at a 10 percent discount, the management fee will be immediately cut by 10 percent, he said. Karpus also said in his proxy that he would work with board members to narrow the fund's discount.
To narrow that discount, Karpus is nominating his own slate of independent fund directors, none of which have ties to either Mentor or First American.
"I think we have a real strong slate of independent directors," said Karpus in an interview. "It [would not be] a rubber stamp board."
Among the Karpus board nominees is Philip Goldstein, closed-end fund activist and principal of Opportunity Partners, an investment partnership, in Pleasantville, NY. Karpus also nominated Gerald Hellerman of Columbia, Md. Hellerman is an independent trustee for two other mutual funds.
Karpus has also nominated Thomas J. Herzfeld as director. Herzfeld is chairman and president of Thomas J. Herzfeld, a registered investment advisory firm in Miami. He tracks closed-end funds and manages the Herzfeld Caribbean Basin Fund, the first closed-end fund to invest in the Caribbean region. Herzfeld often consults for closed-end fund advisors.
"When an adviser sells its agreement to an outside management company, they should take a hard look at what they should do for shareholders in this agreement," said Herzfeld in a telephone interview. "Shouldn't the shareholder get some economic benefit?" Herzfeld owns 6,100 shares of the fund.
Shareholders will be given the opportunity to vote on the issue Sept. 27.
A spokesperson at First American Asset Management declined to comment. A spokesperson for the Mentor Income Fund said Karpus' own proxy disclosure said that Karpus' firm does not currently manage any closed-end or open-end mutual funds.
"The transaction with U.S. Bank is designed to partner the Mentor Income Fund and its shareholders with an experienced and respected closed-end fund adviser of scale," said the spokesperson. "We believe that the Mentor Income Fund shareholders will benefit from First American serving as the fund's investment adviser."