Korea Equity Fund (KEF) and the Korean Wall of Worry

Disclosure: Author is long KEF, SLS, BLU, FGF, and FGI

The recent inquiry and writing from a Dow Jones reporter whom I respect has inspired me to share a more detailed perspective of the Korea Equity Fund (KEF). My original assessment of KEF upon adding it to my account licensed to Covestor’s Well Intentioned Activism Profile Closed-End Funds model was of course cognizant of perpetual headline risk. Headline risk is inseparable from any investment, especially those with direct exposure to Korea. Murray Coleman presented this observation exceptionally well in the context of regional economic expectations, which I will not repeat.

The actual realization of some headline risk in many ways presents a fresh “Wall of Worry” for all related assets. In this case, my preferred vehicle remains KEF. Is KEF my least risky holding? No, but I am interested to own, or with price sensitivity add to a KEF position at a discount greater than I can sell in the now announced tender offer. To the extent of participation, I view the relative valuation variance as a margin for error in my interim holding of a position accessing Korea. This may or may not make KEF better or worse than the passive approach of the iShares product (EWY).

I do not expect all my shares to be taken out in the tender, certainly. Among the numerous observations from a Seeking Alpha contributor I respect, “Gwailo”, is the fact that there is plenty of sophisticated ownership in this security.

Tender results will largely inform the extent to which KEF remains a candidate for further Activism induced liquidity events. Regardless, this year’s election of Phillip Goldstein as a Class I Director to serve a term that expires on the date of the 2013 Annual Meeting of Shareholders is relevant to my assessment of intermediate term risks to the relative market valuation of “discount”. Buying a Closed-End Fund at a discount is not a good thing if that discount expands rather than narrowing.

Phillip Goldstein’s Bulldog Investors, is a prominent Closed End Fund Activist who seems to have achieved value unlocking results on numerous occasions. In my view, their presence has been relevant to liquidity events that have already been announced for other holdings in my account licensed to Covestor’s Well Intentioned Activism Profile Closed-End Funds model including Blue Chip Value Fund (BLU) and Riversource LaSalle International Real Estate (SLS). Although now announced, those liquidity events have not yet come to fruition. Another, SunAmerica Focused Alpha (FGI) has been argued to be an ongoing candidate for Activism in arrears of its first liquidity event (also previously observed by Seeking Alpha contributor “Gwailo”).

One may have reason to anticipate that going forward, KEF shareholders may benefit not merely from active management and the potential to climb a wall of worry, but increasingly shareholder friendly Governance Decisions specifically at KEF.As always, “Mr Market” is the only judge that matters. Only Mr. Market will showcase whether KEF or EWY is the better, or least bad alternative.

The above text is licensed to Covestor Ltd. (“Covestor”), by Dan Plettner. Such text may be disseminated only by Covestor. Dan Plettner invests and receives income for securities research, including “buy-side” research. Dan licenses his own real time trading data to Covestor Ltd. (“Covestor”). Covestor is a Registered Investment Advisor that uses Dan Plettner’s data to create the Core, Activism Profile Closed-End Funds, Long Short Opportunistic, Pure Short Opportunistic, Tax Advantaged Income, Taxable Income, and MLP Direct Ownership models for its clients.