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Shareholder Targets Second Closed-End Fund


The $56 million USLife Income Fund, a closed-end fund managed by Variable Annuity Life Insurance Co. (VALIC), a Houston, Tex.-based unit of American General Annuity Insurance Co., may soon be facing the fight of its 27-year life.

Stewart R. Horejsi, a closed-end fund shareholder activist based in Salina, Kan., is laying the groundwork to seize control of the fund. In a July 26 13D shareholder proposal filed by Horejsi on behalf of himself, family members and familial trusts he oversees, Horejsi asks the USLife Income Fund's board of directors to sever the fund's investment advisory agreement with VALIC.

VALIC has managed the fund since the September 1997 merger of American General Life Insurance Co. with U.S. Life Corp. U.S. Life Corp. was the closed-end fund's original adviser. The USLife Income Fund premiered in December of 1972.

Perhaps more importantly, Horejsi is also asking the board of the USLife Income Fund to approve a change in the fund's investment mandate and remodel the fixed-income fund into a total return fund that invests in both fixed-income and equity securities. According to the filing, Horejsi argues that "the total after tax returns of a fund that invests in equity securities in addition to fixed-income securities is likely to be greater than a fund...that invests solely in fixed-income securities."

But Horejsi, who admits in public filings to having made his personal fortune by investing in Berkshire Hathaway in the shadows of Warren Buffet, concedes that the changes would in fact increase the volatility of fund shares and be disruptive to the dividends generated to fund investors.

The filing also suggests that Horejsi is mulling initiatives to install two investment advisory firms he has personal affiliations with as the fund's new investment manager and sub-adviser: Boulder Investment Advisers of Boulder, Colo., and Stewart Investment Advisers, an investment adviser registered in Barbados. Horejsi is the main principal of both firms.

Not only does Horejsi want to take the USLife Income Fund in a brand new direction with a fresh manager or two, the filing reveals that he is prepared to do so whether or not fund officials, the fund's board of directors or even other investors agree. Though Horejsi doesn't pose any immediate threat to VALIC by virtue of his current ownership of just less than 6 percent of the fund's shares, that is likely to change.

According to the filing, if Horejsi's proposals are not approved by the fund's directors and/or fund shareholders, Horejsi intends to increase his ownership in the fund until he is "able to influence the company to implement the shareholder proposal." USLife Income Fund's annual shareholder meeting is expected to be held in November.

USLife Income Fund is not going down without a fight, however. This past November the fund's board proposed and shareholders approved two significant changes to the fund's articles of incorporation.

The fund adopted a defensive posture which now requires a 75 percent super majority vote to adopt major changes in the fund's structure or future direction, such as open-ending the fund or moving it away from a fixed-income fund. The fund also adopted three-year staggered terms of service for its board members, to ensure that it would take several years for an outside party to gain control of the board. Calls seeking comment from executives at USLife were not returned.

The initial stage of the tug-of-war over the USLife Income Fund comes hot on the heels of an apparent major victory for Horejsi. This past April Horejsi won the second round of a 15-month proxy battle with Flaherty & Crumrine, the Pasadena, Calif.-based investment manager to the Preferred Income Management Fund, another closed-end fund.

Horejsi, who at the time of the proxy battle owned as much as 42 percent of Preferred Income Management Fund's outstanding shares, controlled enough votes to initially elect himself and another trustee to the board at the fund's April 1998 shareholder meeting. In anticipation of the election of three additional trustees with ties to Horejsi, the fund's remaining four board trustees together resigned their positions on January 15, 1999.

Although Flaherty & Crumrine had initially agreed to stay on to manage the preferred stock portion of the evolving fund's broadened portfolio, the firm resigned on May 18.

While the battle between the USLife Income Fund and Horejsi is just beginning, the battle over who will replace Flaherty & Crumrine to manage Preferred Income Management Fund will officially be decided by a proxy vote scheduled for later this month.

In a new proxy statement filed on behalf of the fund, the new board recommends approving Boulder Investment Advisers as the fund's new manager, with Stewart Investment Advisers becoming the subadviser for the equity and cash management portion of the fund's portfolio. The board already approved Spectrum Asset Management of Newport Beach, Calif., to replace Flaherty & Crumrine as of July 1, 1999, to serve as the interim subadviser for the fund's preferred stock holdings.

According to Horejsi, there is no master plan behind his efforts to gain control of the two funds, other than his desire to be in a position to "influence the portfolios." Is any other fixed-income closed-end fund on his acquisition list? "That's all I've got on my plate right now," he said.