Groundbreaking Closed-End Fund Opens
May 10, 1999
The Dessauer Global Equity Fund, which attracted considerable attention when it was introduced as a closed-end fund because of its commitment to open under certain conditions, has been re-introduced as an open-end fund.
Since day one, it was always expected that the fund would be opened, said Tom McIntyre, president and portfolio manager of the fund and principal of Dessauer & McIntyre, the fund's adviser.
The fund stopped trading on April 23 and was re-introduced as an open-end fund on April 29.
McIntyre says he is not disappointed that the fund was opened. Instead he says he was fortunate to have managed the fund in a closed-end environment for the first two years of its life and to have built up a good track record.
"I think it was a success," McIntyre said. "We did what we said we were going to do."
Although McIntyre expects to see some significant asset outflows over the next few months, he plans to ally with some distribution partners and devise a public relations strategy to try to minimize those outflows.
When the fund was introduced in April 1997, its initial public offering document contained an "automatic conversion provision." The provision stipulated that the fund would automatically convert to an equivalent open-end mutual fund beginning 18 months after its launch if the fund's market shares traded at a five percent or greater discount to net asset value for 15 consecutive weeks or longer. According to the stipulation, approval by shareholders to open the closed-end fund would be unnecessary. This was notable because it was the first time a closed-end fund had made the commitment to open before it had become available.
Closed-end funds in recent years have fostered numerous skirmishes pitting increasingly demanding stockholders on one side and frustrated investment advisers on the other. Disputes arise over what to do about nagging discounts of closed-end funds' net asset value prices to their publicly-traded stock prices. Some funds have chosen to open in response to stockholder discontent, others have fought proxy battles and others have chosen to liquidate rather than open.
The Dessauer Global Equity Fund was originally co-managed by Guinness Flight Investment Management of Pasadena, Calif., and Dessauer & McIntyre Asset Management, a newcomer located in Orleans, Mass. But, Dessauer & McIntryre took over as sole investment adviser in January 1998 after the two advisers found that their investment styles conflicted.
The idea of the automatic provision was that of Jim Atkinson, managing director of Guinness Flight. In late 1996, the then co-managers of the fund asked the SEC for approval to include their automatic conversion provision in the IPO prospectus. After several months of consideration, the SEC agreed, paving the way for other closed-end funds to follow suit.
"Up until then it was not permitted (by law) even if it was good for the shareholders," Atkinson said. Some people, including the regulators, thought it was simply a marketing ploy, he said. "They couldn't understand our motive."
While some other advisers expressed interest in adopting the automatic conversion, Atkinson is unaware of others which have done so.
Anticipating the pressure that could build to address a potential persistent discount, other closed-end funds have launched with vague prospectus provisions stating that the board would consider what actions to take if the situation arose. But many have failed to define what constituted "persistent" or how deep the discount would have to be before action was taken. Others have finely defined the parameters under which the board would ask shareholders to consider voting to open the fund, but boards have included such provisions reluctantly.
At least two fund advisers now have proxy proposals before stockholders that seem to send mixed messages. The board of the Dreyfus Strategic Government Income Fund has asked investors to consider opening its 11-year-old fund because between October and December 1998, the fund had an average discount of 10.6 percent. The fund's prospectus states that the board will propose opening the fund if it trades at a 10 percent or greater discount for 12 consecutive weeks. But while the proxy mentions opening the fund as a possible remedy, it also lists many arguments against opening a fund. A spokesperson for Dreyfus declined to comment, saying the company did not comment on outstanding proxies.
The R.O.C. Taiwan Fund, which converted into a closed-end fund in 1989, similarly, has a seven-year-old provision requiring the board to submit to shareholders a binding resolution to open the fund if a double-digit discount persisted for 12 weeks or longer. But, its proxy too notes that the board does not favor the action.
Nevertheless, the fund has, unsuccessfully, asked shareholders to consider opening the fund in the last three years. But, the fund has not been able to muster enough shareholders to vote. Last year, over 77 percent of the fund's outstanding shares were not voted either way. Executives at the R.O.C. Taiwan Fund could not be reached for comment.
As a result of funds failing to adopt clear-cut commitments to open if discounts persist, there are now many frustrated and resistant shareholders and a dearth of closed-end funds, said Atkinson.
"That's what the industry has done to itself," he said. "Something needs to be done to deal with the discount issue."