Two closed-end funds have taken unusual steps in recent weeks.
Two vocal shareholder activists-turned fund board members will be stepping down as trustees on one fund, after successfully wresting control of several board seats and changing the fund's investment mandate. The shareholders of another closed-end fund, meanwhile, have voted to withhold compensation for the fund's independent trustees pending the implementation of a plan to insure investors will receive net asset value for their fund shares.
Ron Olin, president of Deep Discount Advisors, an advisory firm in Asheville, N.C. and Phil Goldstein, principal of Opportunity Partners in Pleasantville, N.Y., are not standing for re-election as board trustees to the Clemente Strategic Value Fund. Another trustee, Gerald Hellerman is also not standing for re-election. (See related story p. 16)
The three men had waged a multi-year proxy battle with the fund's adviser, Clemente Capital Management of New York. They successfully won board seats along with two other individuals in October 1998. Since then, at the direction of these trustees, the fund's investment objective was changed from global equities to domestic equities and its name was changed from Clemente Global Growth Fund.
But, the Clemente board member activists have publicly disagreed on how best to proceed in the interests of shareholders. Goldstein supports obtaining net asset value for Clemente shareholders by opening or liquidating the Clemente fund. Olin believes investors would best be served through preservation of the fund's closed-end structure and supports a share buyback program.
Last year, the Clemente board approved a share buyback program aimed at reducing the fund's discount - the difference between the fund's publicly-traded share price and its portfolio's net asset value price per share. The fund has been trading within the 14 to 18 percent discount range most of this year, according to Lipper, the data provider in Summit, N.J.
"Olin has decided he does not want people on the board who do not support the closed-end structure," said Goldstein in an interview. "But any company whose stock for a consistent period of time is selling below liquidating value has a problem." Goldstein said that he and Hellerman were asked not to seek re-election.
While Goldstein and Olin will no longer be board members, Olin's influence will continue to be felt, according to Goldstein. Olin continues to own 30 percent of Clemente's shares for himself and his advisory clients.
Olin argued that allowing a few investors to realize net asset value would be at the expense of others, according to the Clemente preliminary proxy statement filed on Feb. 23.
"Attempts to deliver NAV immediately to a minority of shareholders who wish to exit the fund may well destroy or diminish the advantages otherwise enjoyed by the remaining shareholders" said the proxy. Olin was unavailable for comment.
Walter Baer, a minority Clemente shareholder in Santa Monica, Calif. has proposed that shareholders be allowed to receive net asset value for each of their fund shares without a sales charge. Baer has recommended the implementation of a self-tender offer under which investors could redeem their shares at net asset value. He has also recommended a continuous share buyback program along with the self-tender offer.
But Baer's supporting statement takes language from a proxy proposal made by Olin to the board of The Portugal Fund earlier this year. In fact, the same solution he is now proposing was originally proposed to the former board members of the then Clemente Global Growth Fund by Olin in the summer of 1998, said Baer.
"Many of us individual shareholders applauded his [Olin's] team when they were first elected directors," said Baer in an interview. "In my view, Mr. Olin's letter represented some kind of moral obligation to hold a tender offer."
Clemente shareholders are scheduled to vote on the slate of proposals April 26.
An unrelated closed-end fund, the Mexico Equity and Income Fund, has also seen surprises this year. After several postponed shareholder meetings, shareholders not only voted to elect Phil Goldstein to the fund's board of directors - the second board seat the shareholder activist has attained - but they also gave their approval to a unique proposal initiated by Goldstein.
The two-part proposal called for a plan to be drawn up to allow shareholders to realize net asset value for their shares. But shareholders also approved a change in the fund's by-laws, stipulating that the fund's trustees would have their usual board compensation put in escrow until investors were allowed to cash in their shares at the higher net asset value share price. The $104 million Mexico Equity and Income Fund is co-managed by Advantage Advisers of New York, a subsidiary of CIBC World Markets and Acci Worldwide, which manages the fund's Mexican securities.
Since Goldstein is a newly-elected director, his pay will also be withheld. Still, Goldstein believes the plan better aligns the board's interest with shareholders' interests, although he does believe directors should be paid for their service. A call to Advantage Advisers seeking comment was not returned.
But industry executives and lawyers question whether a plan to withhold trustees' pay where a persistent discount has plagued a closed-end fund is wise, and legal. Withholding pay until directors allow shareholders to redeem at a good price is simply not a good idea, said Brian Smith, president of the Closed-end Fund Association in Kansas City, Mo.
"It would be sheer lunacy to turn over fund management to enable people to hijack the objective of the fund," he said. The association will be releasing a report and its position on closed-end fund governance sometime this summer.
The notion that directors are not entitled to their fees because of the discount does not make sense, said Carl Frischling, a partner with Kramer Levin Naftalis & Frankel in New York.
"There are lots of things a director gets paid for besides just dealing with a discount," he said. "It sets a bad precedent that directors have to come up with a plan" to be entitled to receive their fees.
One strategy shareholder activists have used is to recast proposals as amendments to bylaws, said David Sturms, partner with Vedder Price Kaufman & Kammholz in Chicago. But decisions regarding whether the fund should open or implement other programs fall squarely within the purview of the board of directors, who are in turn elected by the shareholders, he said.