Over the last few years, a handful of so called "closed-end fund activists" have pushed to eliminate the discount between share price and net asset values of many closed-end funds. But Stewart Horejsi, who grew up in Salinas, Kan. is different. A former gas salesman for his family's welding company, Horejsi has no desire to push for funds to be opened or to buy back shares to tackle a persistent discount. Rather Horejsi, who last year seized control of the Preferred Income Management Fund and turned the day-to-day portfolio management over to two investment firms for which he is a principal, plans to wrest control of two other closed-end funds - the USLife Income Fund and the First Financial Fund.
Lori Pizzani, a free-lance writer, recently spoke with Horejsi from his home in Paradise Valley, Ariz..
MFMN: How did you first get interested in investing?
Horejsi: I graduated from the University of Kansas in 1959 and received my Masters from Indiana University in 1961 in investments and banking. Finance and investments was always my first love. In my junior year of college, I first bought a few stocks.
MFMN: But you did not initially pursue a career in the finance and investments field?
Horejsi: No. I joined my family's welding supply business. I went to help my family's company and I got stuck there. In 1980, we sold the Oregon business. I took a sabbatical and read, read, read. I started studying investments and did better with my investments. I read about Berkshire Hathaway's Warren Buffet and bought shares of his company. His success record appealed to me. You don't have to be around him very long to pick-up on his sense of integrity.
MFMN: Some have labeled you a Buffet follower and have suggested that Buffet is your mentor. Is this accurate?
Horejsi: He's my mentor in that I go to annual (Berkshire Hathaway) meetings and read his annual reports. I admire him and what he does.
MFMN: You have been managing your family's money for some time?
Horejsi: Yes, my maternal grandmother, Lola Brown, died in 1963 and left $100,000 in trust. That trust is now worth $200 million. I also have two parental trusts from when my parents died 10 years ago. Those two are now worth between $10 million and $20 million.
MFMN: How did you become interested in closed-end funds?
Horejsi: I first became interested in closed-end funds about four years ago because of the sizeable discounts that existed. I screened some and thought maybe we'd be able to get control. I'm not prone to chase stocks.
We started buying the Preferred Income Fund at a time that I thought equities were overpriced. I chose PFM because I thought I would keep it as a fixed-income product. PFM was attractive because of its downside hedge. At that time, I bought two or three funds but I was most successful with PFM. I decided I wanted to have some say in what the fund did.
MFMN: You consequently purchased as much as a 42 percent stake in the fund and were successful, via a long proxy battle with the fund's adviser, Flaherty & Crumrine of Pasadena, Calif., in determining the outcome of the vote. You were able to install your director nominees to the board and get approval for the fund's investment advisory contract to be awarded to Boulder Investment Advisers of Boulder, Colo. and sign on another Barbados-based asset management company you control as the fund's sub-adviser.
What makes you different from other closed-end fund shareholder activists who have tried to influence control over closed-end funds?
Horejsi: I don't think I belong being grouped in with them. I still don't know that I quite understand what they are looking to accomplish. I want to have some board representation. I want to have a say in the fund, to have someone on the board to have a say in what goes on.
MFMN: You have chosen to change the former PFM income fund into a total return fund, by virtue of replacing the fund's bonds with stocks and you have changed the fund's name to the Boulder Total Return Fund. What did the other minority shareholders have to say about these changes?
Horejsi: I've had no direct contact with dissident shareholders. But several Boulder Total Return Fund investors have known me for a long time. Ninety-eight percent of the shares are held in street name, so I can't tell who the shareholders are. I've never talked to a shareholder.
MFMN: The guess is that the $200 million Boulder Total Return Fund is buying shares of Berkshire Hathaway, although no portfolio information has been made public since the changeover. Is this true?
Horejsi: I've long had success with Berkshire Hathaway (stock). Now the price is attractive. The SEC has a limit on investing not more than 25 percent in any one security. I expect that very shortly we will reach that 25 percent limit in the fund in Berkshire Hathaway. Then we will buy other high quality companies. I particularly like financial services companies.
MFMN: You then employed a similar approach to gain influence over the US Life Income Fund managed by VALIC of Houston, Texas.
Horejsi: This past December I sent the board of directors a letter addressing several business issues. In response, they had the adviser's attorneys at Skadden, Arps Slate, Meagher & Flom respond. Why did their lawyers have to answer the letter regarding business questions? Maybe the independent directors aren't independent enough to read their own mail.
MFMN: What attracted you to the USLife fund, also a fixed-income fund?
Horejsi: They were selling at one of the biggest discounts (among closed-end funds) and they didn't have staggered terms for board members (whereby board seats turnover a few each year to thwart a shareholder attempt at dominating the board by electing all new board members).
MFMN: In November, 1998, the U.S. Life Income Fund passed a provision requiring the affirmative vote of a super majority of investors to make a major change to the fund, such as opening or changing the fund's investment focus. How does that effect your plans?
Horejsi: Does it thwart our effort? No. If we can't sell our ideas to a super majority, then maybe we're wrong. There's a lot of difference between buying the fund and getting the advisory contract. I may try to sell the board on the idea that I would be a better investment adviser. But that, by no means, is automatic. U.S. Life's current board wouldn't even listen.
MFMN: Why not just start-up a closed-end fund of your own to manage the money and run your own way?
Horejsi: When PFM came public, they spent $13 million in underwriting fees. Someone before me paid those underwriting fees. I don't want to pay for that when I can buy the fund in the open market for 90 cents on the dollar. By background, I sell air (used in the welding process). I have no experience on how to merchandise a fund.
MFMN: Would you ever consider establishing an open-end mutual fund?
Horejsi: Almost assuredly no.
MFMN: More recently, you have set your sights on a third fund, the First Financial Fund. Why?
Horejsi: I've always liked the financial services sector, but First Financial is totally different because it is not an income fund. Nick Adams, the portfolio manager, has a great record a majority of the time, a good record most of the time but really bad periods some of the time. If he could change that...
I called Nick Adams in early November (to introduce myself.) He called me back two months later and welcomed me as a new shareholder.
MFMN: What are your future plans regarding First Financial?
Horejsi: We'd like to put our representatives on the board. We will continue to buy shares of this fund and USLife Income Fund. Right now, we own an approximate 10 percent interest in USLife Income Fund and about a 17 percent position in First Financial.
Nick Adams' track record is good. I might consider retaining him as the fund's portfolio manager.