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Closed-End Activist May Target a Third Fund


For what appears to be the third time in a year and a half, Stewart R. Horejsi, the closed-end fund activist of Salina, Kan. has set his sites on dominating and transforming a third closed-end mutual fund.

The latest fund Horejsi appears to have designs on is the First Financial Fund that is advised by Wellington Management in Boston. Prudential Investment Fund Management of Newark, N.J. serves as the administrator to the $225 million fund that invests in small to mid-sized banks, bank holding companies and mortgage banking institutions.

According to a Nov. 1 SEC filing, which discloses the amount of First Financial Fund stock owned on behalf of Horejsi and several family trusts, the Horejsi group owned 5.1 percent of the closed-end fund's outstanding shares as of Sept. 30.

That alone may not have concerned First Financial Fund's managers. But, later on in the filing, Horejsi said that he "may seek representation on the company's board of directors" or "may recommend that the company broaden its investment focus." According to the filing, there are no immediate proposals on Horejsi's agenda. Neither Horejsi nor officials at Prudential Investments were available for comment.

Seeking to replace members of a board and changing a fund's investment objective are not new strategies for Horejsi. Earlier this year Horejsi wrestled control of the Preferred Income Management Fund from its adviser, Flaherty & Crumrine, an investment advisory firm in Pasadena, Calif. (MFMN 8/16/99) Horejsi, who owned a 42 percent stake in Preferred Income Management Fund, was able to control enough votes to elect himself and another trustee to serve on the fund's board of directors.

Subsequently, in public documents, Horejsi made clear his intention to convert the fund to an all-equity fund and replace Flaherty & Crumrine as the investment manager to the fund. Moreover, Horejsi proposed that the fund's investment advisory functions be handled by two upstart investment advisory firms Horejsi directly controlled - Boulder Investment Advisers of Denver, Colo. and Stewart Investment Advisers, which is registered in Barbados.

A proxy battle ensued with Flaherty & Crumrine voluntarily resigning its post as adviser to the Preferred Income Management Fund in May. The fund was subsequently renamed the Boulder Total Return Fund and, according to public fund documents, will be increasing its allocation in equity securities in the future.

Following that partial victory, Horejsi announced in July his intention to systematically buy additional shares of another closed-end income fund, U.S.Life Income Fund. U.S.Life is managed by Variable Annuity Life Insurance Co. (VALIC), of Houston, Texas. VALIC is a unit of American General Annuity Insurance Company, also of Houston.

Horejsi again made it clear that he wanted to convert the U.S.Life Income Fund into an equity fund and to replace fund trustees with his own nominees. Though Horejsi only owned a six percent stake of the fund, fund filings reveal that he has been buying additional shares of U.S.Life on a regular basis over the past two years. At the end of October, Horejsi's holdings had risen to seven percent. Horejsi indicated in his filings that he would continue to increase his ownership of the U.S. Life Income Fund until he can influence the future direction of the fund.

Separate recent proxy statements filed on behalf of the U.S.Life Income Fund and Horejsi indicate that a proxy battle is imminent. According to the Nov. 2 proxy issued by VALIC on behalf of the fund, the fund has set aside a $375,000 reserve to be used to pay for the expected proxy contest. Horejsi expects this proxy battle will cost $75,000.

"This is the unfortunate end result of a process of aggressive shareholder actions against vulnerable closed-end funds in which their objective and focus is being completely warped," said Brian Smith, director of the Closed-End Fund Association, an industry trade group in Kansas City, Mo. "It is certainly a free and open market, but this seems to be an extreme way to become a fund manager."