Activist Targets Fund Director Pay
October 18, 1999
Phillip Goldstein, principal of Opportunity Partners of Pleasantville, N.Y. and an outspoken closed-end fund activist, is on yet another campaign against a persistent discount to net asset value in a closed-end fund. The target is Advantage Advisers, the U.S.-based adviser to the $94 million Mexico Equity and Income and an affiliate of CIBC Oppenheimer in New York. ACCI Worldwide, S.A. de C.V. of Mexico, also being targeted, provides investment advisory for the fund's Mexican investments.
Goldstein is pressuring both the fund's advisers and the fund's directors to narrow the fund's persistent discount. Goldstein is even recommending that fund trustees have their directors' fees withheld until shareholders get a viable resolution to the discount problem.
In an Oct. 6 preliminary proxy statement filed with the SEC, Goldstein urged shareholders to first require the fund's two advisers to address the fund's nagging discount by mapping out a plan of remediation for the board to consider. This unspecified plan would "afford shareholders the opportunity to promptly realize NAV for all their shares," said Goldstein in his filing. As of September 24, Goldstein owned approximately 2.46 percent of the Mexico Equity and Income Fund's publicly-traded shares.
In the past two years, closed-end fund shareholder activists have pushed to fire investment managers of open-end funds that consistently trade at prices below the fund's net asset value or even liquidate the funds altogether.
The Mexico Equity and Income Fund has traded at a discount in the 19 percent to 20 percent range for several years, according to Lipper, of Summit, N.J. The fund was introduced in October, 1990.
While that large a discount may appear significant, The Mexico Fund, an equity closed-end fund managed by Impulsora del Fondo Mexico, S.A. de C.V., and a much larger fund, at the end of September was trading at a discount of 27.5 percent, according to Chris Bouffard, a closed-end fund analyst for Lipper. The Mexico Fund currently has total net assets of approximately $1 billion.
In his proxy filing, Goldstein suggested that if the advisers to the Mexico Equity and Income Fund do not recommend a plan to deal with the discount within 30 days, both of the fund's investment advisory contracts should be terminated.
According to Goldstein's proxy proposal, if the directors of the Mexico Equity and Income Fund oppose the plan to erase the discount recommended by the fund's advisers, each of the fund's independent directors would have their compensation temporarily withheld. This is the first time Goldstein has proposed targeting the fees fund directors earn for their board service.
"It is inconsistent (for shareholders) to wait to be compensated, while the directors get paid every quarter," Goldstein said in a telephone interview. "I'm not saying don't pay them...but this better aligns the interest of directors with shareholders."
According to a 1998 proxy statement filed on behalf of the Mexico Income and Equity Fund, the fund's three independent directors earned an average of $8,883 annually for their fund board service. That includes a $5,000 annual retainer, plus another $700 for each board or committee meeting attended in person and $100 for each meeting a director participates in via telephone.
Last year, Goldstein submitted a proxy proposal for this same fund asking shareholders to terminate the fund's advisers. While the shareholder vote passed by a margin of two to one, it failed to garner the majority vote necessary for passage.
In the meantime, Advantage Advisers has initiated a complex four-step plan of its own to deal with the fund's discount. On Oct. 11, the fund manager announced the start of a combined share repurchase and subsequent tender offer program to run through November, 2000.