Altered Clemente Fund Faces Old Struggles
June 7, 1999
Eight months after shareholder activists won a major victory and the majority of seats on the board of directors of the closed-end Clemente Global Growth Fund, the $75 million fund is undergoing significant change. Nevertheless, the fund still faces familiar problems - a recurring discount and meager year-to-date performance.
At a shareholder meeting May 21, the Clemente Global Growth Fund won approval for a handful of proposals including changing the fund's investing mandate and its name to the Clemente Strategic Value Fund. The change in mandate allows the fund to focus less on global securities and more on domestic ones. The inclusion of "value" in its name also reflects the fund's new commitment to buying under-valued assets- including closed-end funds which are trading at discounts.
According to the fund's recent proxy statement, the goal of the fund, introduced 12 years ago, was to take advantage of global market opportunities. But in recent years, as Asian markets sank, the fund's portfolio had begun to shift back to domestic markets. Clemente Capital of New York is the adviser for the fund's foreign securities while Wilmington Trust Company of Wilmington, Del., was brought in as the adviser to the U.S. portion of the fund in 1997. In 1996, Wilmington bought a minority 24.9 percent stake in Clemente.
Allowing the fund to focus more on U.S. stocks means increased liquidity and reduced volatility for the fund, said Ron Olin, the fund board's chairman of eight months and president and CEO of his own advisory firm, Deep Discount Advisors in Asheville, N.C. Olin is the swing vote for the fund because he owns, for himself and his advisory clients, approximately 30 percent of the fund's shares, Olin said.
At the recent meeting, closed-end fund shareholders also voted to lift the prohibition against the fund's investment in other investment companies. Ironically, that now means the fund can shift up to 10 percent of its portfolio into investments in closed-end funds trading at discounts. According to Olin who has spearheaded a board effort to renegotiate fees paid by the fund and reduce fund expenses, it is five to ten times more costly to provide custody for foreign domiciled securities than for domestic securities. Olin believes the Clemente fund can gain exposure to promising global markets by investing in foreign closed-end funds, while reducing the custodial costs related to direct overseas investments.
But the vote allowing the investment in other investment companies was ironic because since 1997, Olin and other shareholders have repeatedly pressured Clemente Capital, the fund's adviser, to find a solution to the fund's persistent discount. A discount exists when the fund's publicly traded shares trade below the fund's net asset value share price. Clemente's discount had soared to as high as 25.7 percent in December 1996, according to Lipper of New York.
Frustrated shareholders even threatened to oust Clemente as the fund's adviser. Shareholders also complained about earlier poor performance that eventually led to Clemente's hiring of Wilmington Trust to manage a portion of the assets.
In September, five Clemente shareholder activists were elected for the first time in closed-end fund history to hold a majority of the fund's nine board seats. New to the board were Olin, along with two of his employees, Gary Benz and Ralph Bradshaw, Philip Goldstein, principal of Opportunity Partners of Pleasantville, N.Y. and Gerald Hellerman of Columbia, Md., and managing director of Hellerman Associates. While Olin and associates ran on a platform of increasing shareholder value through an anticipated share repurchase program, Goldstein said he would strive to allow shareholders to realize the fund's considerably higher net asset value price, possibly through the fund being opened.
These same fund shareholders-turned-directors who long battled with Clemente's fund management to find a cure for their own fund's discount, now hope to capitalize on other close-end funds plagued by similar trading discounts. And, it is unlikely Clemente will be in a hurry to help eliminate these funds' discounts.
"We will be in there strictly as passive investors," said Tom Prappas, portfolio manager of the Strategic Value Fund.
Even as the fund is being allowed to invest more domestically and to invest up to 10 percent in foreign closed-end funds, the board is divided on how to, once and for all, eliminate the fund's stubborn discount. Board members have formed two camps with Olin and his two employees on one side and Goldstein and Hellerman on the other.
This past October, the newly reconstituted Clemente board instituted a share buyback program. Under the program aimed at shrinking the discount, the fund continually repurchases shares when a "more than nominal discount" is present, said Olin. According to Olin, the fund has so far repurchased some 876,000 shares at an average 12.6 percent discount. That has boosted the fund's share price by 18 cents. But the repurchase program has far from entirely extinguished the fund's discount. According to Lipper, the Clemente fund has traded at an average 9.3 percent discount through April of this year. The discount is now in the 11 percent to 12 percent range.
"I don't think you'll ever have a situation where you totally eliminate the discount," said Olin. "The only way to eliminate the discount for all time is to liquidate or open-end the fund." But Olin is adamant in his view that opening the fund would be detrimental. He believes in the long-term power of the share repurchase strategy to eventually narrow the discount to a nominal three percent to five percent or even be transformed to a premium.
Goldstein, who said that board members are polarized on solutions, disagrees with Olin.