For the first time ever, shareholders of a closed-end fund have cast enough votes to oust an investment adviser.

Shareholders of the $43.8 million New South Africa Fund voted Dec. 8 to terminate the contract of Fleming International Asset Management of London as the fund's adviser. Fleming is an affiliate of Robert Fleming Holdings in London, which collectively manages $100 billion.

However, the shareholder vote to oust the adviser became moot two days later when the fund's board of directors, acting on another shareholder resolution, decided to liquidate the fund instead. The two shareholder votes came in response to a request by the adviser for suggestions on how it should address a persistent discount to the fund's net asset value. The City of London Investment Group in London, which holds a 19 percent stake in the fund, submitted the proposal to remove Fleming. Phil Goldstein, principal of Opportunity Partners of Larchmont, N.Y., submitted the non-binding liquidation proposal.

Pending a second required shareholder vote on liquidation, the four and a half year old fund will be immediately liquidated and its assets reinvested in U.S. Treasury and money market instruments. If not for the decision to liquidate, the shareholder vote would have required Fleming's removal as adviser within 60 days.

Both a persistent discount which had grown as steep as 31.69 percent this past September, and a plunging net asset value had plagued the fund, according to CDA/Wiesenberger of Rockville, MD. The fund's annual net asset value return ending 12/31/97 was -31.27 percent. In early October Fleming announced that Steven Mills, chief investment officer of affiliated Fleming Martin Asset Management, would become fund manager, replacing Raymond Goldblatt who had resigned.

Despite the superceding liquidation decision, the shareholder vote to remove the adviser is significant and is likely to lead to more, similar actions, industry observers said.

"The fact that they (shareholders) voted to change the manager was important because this is one of the first times this has worked," said Gregg Wolper, closed-end fund analyst at Morningstar in Chicago. This past April, closed-end shareholders were effectively handed the power to fire a closed-end fund's management when the SEC denied no-action letters to a consortium of fund advisory firms. The eight advisory firms maintained that it was up to an individual fund's board of directors to consider terminating the advisory contract if asked by a majority of shareholders.

The SEC, in a landmark victory for shareholder activists, disagreed. It warned fund sponsors that it was shareholders who have the last word on firing an investment manager, not the board. Furthermore, an adviser could be ousted by shareholders even if the board opposed the action, the SEC said.

In the case of the South Africa fund, not only was the successful shareholder vote to remove the adviser, followed by an overriding decision to liquidate novel. In addition, the City of London proposed that the board consider re-hiring Fleming to manage the fund but under a new and possibly unique advisory contract. The new contract, structured to tie Fleming's advisory compensation to the size of the fund's discount or premium, would essentially have penalized the adviser when the fund traded at large discounts and rewarded it when the fund traded at a premium.

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