Author: Dan Plettner
Covestor models:
Disclosure: Long FGI and FGF in Core, Well Intentioned Activism Profile Closed-End Funds, Long/Short Opportunistic
A fool and his money are soon parted. In the investment industry, observation of advisors wasting client wealth occurs far too frequently. What is uncommon in the investment business is to watch advisors waste not only the investor’s wealth, but the advisor’s own ability to bill the fund company on assets under management (“AUM”) – the advisor so culturally engrained with disservicing investors that they disservice themselves in the process.
SunAmerica’s Closed-End Funds Focused Alpha Large-Cap (FGI) and Focused Alpha Growth (FGF) may provide the rare example.
In Closed-End Funds, once shares are issued in an IPO, the advisor has minimal financial interest to add value for the funds’ shareholders. Shareholders cannot simply redeem their shares for Net Asset Value (“NAV”); in aggregate they are captive. If nobody wants to buy a certain closed-end fund at NAV, it will trade at a discount. The advisor collects fees from the Closed-End Fund regardless whether the advisor appears to have added value, and whether the shares have traded at a perpetual discount.
FGI and FGF traded to a discounted valuation shortly after their IPOs, and have stayed there. Shareholder proposals to terminate each funds’ Advisory Agreement appear on every shareholder’s voting proxy this year. The proposal could have the effect for every shareholder to achieve liquidity at or near NAV, although that point may not be apparent to all readers of the proxy.
Regardless what is best for shareholders, the advisor’s financial streams from the fund’s underlying assets would stop if shareholders collectively exited. Would it surprise anyone to learn the board has recommend voting against the proposals, and that broker non-votes will be treated as votes against?
On March 29, DealFlow Media’s Closed-End Fund Alert (to which I contribute) covered the shareholder base, and the extent of foresight with which SunAmerica was (or wasn’t) managing their AUM sacrifices. Two days later, FGI and FGF announced their chairman was retiring, and that existing legal counsel had been nominated to replace him.
I own FGI and FGF shares only because I believe the shareholder base will escape captivity. The voting power and savvy of filers including as Bulldog Investors (18.55% of FGI and 18.52% of FGF), and Karpus Management (whose schedule 13-G’s accounts for another 13.21% and 8.52% of ownership respectively) lead me to believe that the proposals will pass or that their favor will cause the meetings to be canceled for more amicable proxies. I do not think it matters how foolish SunAmerica’s boards assume their shareholders to be. Not here. I do not think it matters how little SunAmerica cares how it defines itself as a money manager. Not here. There are lots of smart shareholders.
Throughout the post-IPO years, while market discounts were allowed to persist (and reflected in lesser values of shareholders’ positions) was a culture born? Was the habit of not creating value for shareholders even more culturally learned by the boards than prioritizing the advisor’s AUM interests?
The answers may only matter to onlookers seeking to look at FGI and FGF as a case study of poor planning. In my estimation, the inmates are escaping the captive walls of FGI and FGF. Still, the boards are reluctant to grasp the reality of the situation. With every passing day the shares are increasingly in the hands of institutional investors. The only thing current boards might do is delay the inevitable, further adding to the coffers of their lawyers tasked with the same priorities that existed long ago. I see the boards’ choice to oppose the proposals without offering an open-ended alternative as only their latest foolish choice.
Sources:
“SunAmerica Closed-Ends FGI and FGF: Large-Scale Liquidity Events Appear Inevitable” Dan Plettner, 3/29/11, Closed-End Fund Alert http://www.dealflow.com/alerts/closedendfund/wires/article.cfm?id=rueminiuwndwkrz
Press Release, 3/31/11 “SunAmerica Closed-End Funds Announce Appointment of New Director and Chairman of the Board”
https://www.businesswire.com/news/home/20110331006987/en/SunAmerica-Closed-End-Funds-Announce-Appointment-Director-Chairman
Bulldog Investors, Schedule 13D filing at SEC 4/1/11
https://www.sec.gov/Archives/edgar/data/1338170/000146218011000017/thirda.txt
https://www.sec.gov/Archives/edgar/data/1327129/000146218011000018/thirda.txt
Karpus Management, Schedule 13G filing at SEC, 12/30/10
https://www.sec.gov/Archives/edgar/data/1048703/000104870311000065/fgi13ga.htm
