closed end fund contested proxy

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TinpotInvestor
Posts: 19
Joined: Sun Dec 01, 2013 12:45 am

closed end fund contested proxy

Post by TinpotInvestor » Sun Sep 08, 2019 9:05 pm

My mother received notice of a contested proxy regarding Neuberger Berman High Yield Strategies Fund (NYSE American: NHS). Saba Capital Management, the opposition, has taken a 19.3% stake in the fund. They want to elect their slate of 3 directors,

to terminate the Management Agreement between the Fund and Neuberger Berman Management,

and to request that the Board consider authorizing a self-tender offer for all outstanding shares of the Fund at or close to net asset value. If more than 50% of the Fund’s outstanding shares are submitted for tender, the tender offer should be cancelled and the Board should take the steps necessary to liquidate or convert the Fund into an open-end mutual fund.

What does this all mean? I understand the Fund trades at a discount to NAV, and Saba capital wants to capture this difference. Is this good or bad? Does this depend whether or not one is a short-term investor or a long term investor?

Seems like this fight has been written about in the Wall Street Journal: https://www.wsj.com/articles/boaz-weins ... 1567033568

What are your thoughts on this?

typical.investor
Posts: 1092
Joined: Mon Jun 11, 2018 3:17 am

Re: closed end fund contested proxy

Post by typical.investor » Mon Sep 09, 2019 3:32 am

TinpotInvestor wrote:
Sun Sep 08, 2019 9:05 pm
What does this all mean? I understand the Fund trades at a discount to NAV, and Saba capital wants to capture this difference. Is this good or bad? Does this depend whether or not one is a short-term investor or a long term investor?
I view it as bad news.

https://www.skadden.com/insights/public ... llion-bite
Saba’s attacks on the closed-end fund community appear to be paying off well for the company and its hedge funds: As part of the Invesco standstill agreements, the funds’ boards agreed to cause the funds to commence tender offers to repurchase either 15% (with respect to two of the funds) or 20% (with respect to one of the funds) of their outstanding common shares, at a price equal to 98.5% of net asset value. If fully subscribed, which is virtually assured when a high proportion of shares are held by short-term profit-seeking activists, the tender offers will eliminate another $290 million in exchange-traded closed-end fund assets. In return, Saba agreed to withdraw its proposed nominees and its proposals to seek shareholder votes to declassify the boards. The agreement confirms that such proxy contests and related lawsuits are not about “good governance” or any other salutary purpose but rather, about coercing closed-end funds that cannot adequately protect themselves into delivering a short-term profit for Saba, other activists and their hedge fund investors, at the expense of the long-term retail investing public.

bberris
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Joined: Sun Feb 20, 2011 9:44 am

Re: closed end fund contested proxy

Post by bberris » Mon Sep 09, 2019 5:35 am

Skadden is a biased law firm whose business is defending closed end funds from activist shareholders who want to close the discount. Any reduction in assets causes the fund sponsor to lose income. Yes, you should vote with Saba to get the fund to make a tender offer. Some of these efforts have succeeded in partially or fully liquidating the fund, but the odds are against it working. It depends on how many shares the activist (Saba) accumulated.

If you tender your shares along with Saba, there is no downside in a tender offer to "the investing public".

typical.investor
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Joined: Mon Jun 11, 2018 3:17 am

Re: closed end fund contested proxy

Post by typical.investor » Mon Sep 09, 2019 6:05 am

bberris wrote:
Mon Sep 09, 2019 5:35 am
If you tender your shares along with Saba, there is no downside in a tender offer to "the investing public".
The potential downside is that you have capital gains to contend with or the fund closes and you can't find a suitable replacement. The Neuberger Berman High Yield Strategies Fund uses leverage, so if you just drop the proceeds into an ETF or mutual fund, your mother is going to see the coupons cut. Maybe that's what she wants, or maybe she is used to the payout.

There is also liquidation risk. The fund may be holding assets which are illiquid and will have to be discounted to move.

typical.investor
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Re: closed end fund contested proxy

Post by typical.investor » Mon Sep 09, 2019 6:26 am

bberris wrote:
Mon Sep 09, 2019 5:35 am
Skadden is a biased law firm whose business is defending closed end funds from activist shareholders
Funny.

And I say Leah Jordan, V.P. of Investor Relations at Saba Capital Management is plain dishonest.

While Leah points out accurately that there is no problem to holding a CEF at a discount:
Any investor could go out and buy a closed end fund trading at a 10% discount to NAV and hope that some reversion happens where that discount goes back to NAV or just moves up generally. But sometimes that doesn't happen. There are funds that have been trading at double digit discounts since 2013, and while you can sit there and hold it and you earn additional yields because bond math 101, something trading at 90 has a higher yield than something trading at 100.
Leah then deceitfully states:
What adds value is that over time, the managers don't really want their funds trading at a discount in a lot of cases. They would prefer there be value in their name brand. We've had really a lot of success going to the managers of these funds and saying, "Look, you have the opportunity to do something shareholder friendly. Return value to your shareholders through a tender. Open end the fund, have it traded on NAV like an ETF. You can buy back shares. You can increase your distribution to make the yield higher”. And it's been really successful as a way to narrow that discount. There have been over 40 instances over the past years where managers have agreed to do something of that nature. That way, you have sort of a catalyst to get some of that value back from the discount.
We know it's inaccurate because Saba is having to sue these managers who they claim are going for it with open arms.

If I had wanted an open ended ETF that trades on NAV, I would have bought one. How about you?

I don't trust at all that the process of liquidating illiquid securities would go in my favor, and suspect that the liquidation, if partial, would be to the detriment of ongoing share holders.

bberris
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Joined: Sun Feb 20, 2011 9:44 am

Re: closed end fund contested proxy

Post by bberris » Mon Sep 09, 2019 6:44 am

typical.investor wrote:
Mon Sep 09, 2019 6:26 am
bberris wrote:
Mon Sep 09, 2019 5:35 am
Skadden is a biased law firm whose business is defending closed end funds from activist shareholders
Funny.
...
Don't believe it? Here's what Skadden's website says:

"
...
Our attorneys assist companies with responding to shareholder proposals, dealing with Institutional Shareholder Services and other proxy advisory firms, and preparing proxy and annual meeting processes and best practices. We also represent companies on the most current corporate governance issues and trends, including proxy access, say-on-pay, shareholders’ ability to call special meetings and majority voting in director elections. Our team also works closely with our SEC reporting and compliance practice in governance-related areas involving securities laws and regulations."

typical.investor
Posts: 1092
Joined: Mon Jun 11, 2018 3:17 am

Re: closed end fund contested proxy

Post by typical.investor » Mon Sep 09, 2019 7:02 am

bberris wrote:
Mon Sep 09, 2019 6:44 am
typical.investor wrote:
Mon Sep 09, 2019 6:26 am
bberris wrote:
Mon Sep 09, 2019 5:35 am
Skadden is a biased law firm whose business is defending closed end funds from activist shareholders
Funny.
...
Don't believe it? Here's what Skadden's website says:

"
...
Our attorneys assist companies with responding to shareholder proposals, dealing with Institutional Shareholder Services and other proxy advisory firms, and preparing proxy and annual meeting processes and best practices. We also represent companies on the most current corporate governance issues and trends, including proxy access, say-on-pay, shareholders’ ability to call special meetings and majority voting in director elections. Our team also works closely with our SEC reporting and compliance practice in governance-related areas involving securities laws and regulations."
I see no bias there. Sure they are involved with proxy votes and corporate governance, but that doesn't mean they are against shareholder's interests.

As a CEF holder who wants to use a CEF because it's a good holding vehicle for less liquid assets and can make use of leverage, it's in my interest to not covert the CEF to and ETF.

By the way, do fund managers really get more revenue by having a fund that is trading at under NAV? If you take 10% out, and now it's at NAV, won't their fees be the same?

bberris
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Joined: Sun Feb 20, 2011 9:44 am

Re: closed end fund contested proxy

Post by bberris » Mon Sep 09, 2019 7:20 am

Fees are based on net assets under management. Any partial liquidation results in lower fees. The market price of the fund does not determine fees in any case I have seen.

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unclescrooge
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Re: closed end fund contested proxy

Post by unclescrooge » Mon Sep 09, 2019 9:27 am

It's only trading at a 6% discount.

While it was trading at a 15% discount last year, the current discount hardly makes it worth it.

The narrowing of the discount and increase in NAV helped the fund increase 30% YTD.

I wouldn't bother responding.

I went through a similar process over a year ago with a close end Muni bond fund. The fund managers said that if the discount remained over a certain% for a certain period, they would put liquidation to a vote.

Majority of shareholders voted yes, so over a 3 mouth period so slowly liquidated the fund. I received 100% of NAV at the end, but information on the final payout was hard to come by. I had to call the brokerage and the fund management company, both of which were helpful.

psteinx
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Re: closed end fund contested proxy

Post by psteinx » Tue Sep 10, 2019 11:10 am

It is almost always good for holders of significantly discounted CEFs to sell at/close to NAV, if they get the chance.

If the fund was at a 15% discount, and is now at a 6% discount, then the holder could take advantage of the narrowed discount to sell now, or wait in hopes of getting out at a 0% discount or perhaps a 2% discount or whatever. But there's a solid chance that if/when the activists leave the scene, the discount could trend back to 15% or worse. And the remaining shareholders might see worse performance because some fund costs are fixed, and may be spread across a smaller remaining asset base.

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