MORE DOORS ARE OPENING AT CLOSED-END FUNDS: MANAGEMENT CAVE-INS RISE, AS BIG INVESTORS TEAM WITH DISSIDENTS

Prodded by pesky professional dissidents, a growing number of closed-end mutual funds have dropped their hard line against open-ending funds trading at long-standing discounts.

Already this year, eight closed-end funds are slated to liquidate, convert to open-end status or merge into similar open-end funds. Another four funds are mulling similar proposals, making 1999 a potential record year for such cave-ins.

Next month, shareholders of Prudential Securities Inc.’s First Australia Fund Inc., Alliance Capital Management LP’s Southern Africa Fund Inc. and Credit Agricole Indosuez’s France Growth Fund Inc. will vote on proposals to elect slates of directors who advocate firing the fund managers and open-ending or liquidating. The three contests are being led by Ronald Olin, 53, a onetime IBM middle manager who founded Deep Discount Advisors in Asheville, N.C., a dozen years ago.

Also next month, Phillip Goldstein, a former New York City civil engineer, is leading a proxy bout to elect himself and Gerald Hellerman — a trustee of Martin Whitman’s Third Avenue Funds — as directors of the Emerging Markets Infrastructure Fund. Their stated mission: to fire manager Credit Suisse Group.

Mr. Goldstein also expects to file a similar opposition proxy for the June annual meeting of Daiwa Securities Co.’s Taiwan Equity Fund Inc.

Mr. Olin and Mr. Goldstein, 54, have become the leading lights in an increasingly rancorous movement to push to bring the closed-end funds’ price in line with the net asset value of their underlying securities. Both are considered professional dissidents with more than a touch of arbitrageur: They buy funds trading at steep discounts, then seek to make profits by pressing for changes to narrow the discount.

“I don’t think this movement would have gained as much power as it has if management had been proactive on addressing persistent discounts until they were challenged,” say Mr. Goldstein.

Closed-end funds, unlike their open-end counterparts, issue a fixed number of shares that trade on a stock exchange. The stock can trade at a discount or a premium to the net asset value of the underlying securities — highly alluring to value investors who see profit opportunities for these thinly traded investments which have largely fallen off the map of the investment world.

Mr. Olin and Mr. Goldstein probably would have remained mere annoyances to closed-fund boards if it weren’t for the quiet but growing support of institutional investors who’ve been amassing big stakes in deeply discounted closed-end funds from disenchanted individual in-vestors who’ve dumped their shares.

The buyers include mutual fund managers like Fidelity Investments of Boston and Zweig Advisors of New York, investment banks like Lazard Frères & Co. LLC and Bear Stearns Cos. and even pension powers like Harvard College and the State Teachers Retirement System of Ohio.

“We are not initiating that kind of activity” against management, says Herb Dyer, executive director of the Ohio system, based in Columbus. Nevertheless, Mr. Dyer says his fund often backs activists’ proxy votes.

Though it’s difficult to know when institutions vote with professional dissidents — they’re usually tightlipped about their positions — they’ve clearly helped prod fund boards to action.

“The heat has become hot enough to where directors and management companies are often deciding it’s not worth the fight,” says closed-end fund analyst Don Cassidy with fund tracker Lipper Inc.’s Denver office.

That’s quite a change from a year ago, when fund boards appeared invulnerable to shareholder criticism. Even when investors voted overwhelmingly for open-ending proposals, directors often ignored the non-binding measures.

“Boards simply concluded that the proposals ‘weren’t in the best interest of shareholders,’ ” says an exasperated Mr. Olin.

Last summer, the Securities and Exchange Commission armed Mr. Olin, Mr. Goldstein and other dissidents with a powerful club, saying that boards must honor successful shareholder proposals to boot managers, rather than view them as merely advisory (InvestmentNews, July 7, 1998).

The decision inspired several funds that invest in Europe, Asia and Latin America to quickly take steps to combat nagging double-digit trading discounts. Measures to combat discounts were announced, from limited buybacks of shares to cuts in management fees based on a fund’s trading discount.

Some managers, like Minneapolis-based U.S. Bancorp.’s First American Asset Management fund unit, folded several closed-end funds into similar open-end funds.

Other boards that had strongly fought efforts to shift to open-end status or to liquidate are now supporting such plans, including those representing Mercury Asset Management’s United Kingdom Fund (a Merrill Lynch & Co. property), Dresdner’s RCM Europe Fund and Banco Santander SA’s Emerging Mexico Fund.

The trend is hardly a mass conversion. Some fund managers have adopted classic defensive measures, such as staggered board service and super-majority shareholder vote requirements.

an alliance surprise

Earlier this month, for example, Alliance reappointed four of its directors — including Alliance chairman Dave Williams — to the board of the Alliance-managed Austria Fund after shareholders voted in January to replace them with Mr. Olin and his allies. Three of the six directors who supported the move on March 19 had ties to Alliance: Mr. Williams’ wife, Reba; Alliance president John Carifa and William de Gelsey, an employee of a company hired by Alliance to help manage the fund.

“The Austria Fund has a board of directors which has been a strong contributor to the investment process over the years,” explains Edward Bergan, Alliance general counsel and fund secretary.

“The board took note that it was not in the interest of the shareholders to be without the expertise of some of those directors who were voted off in January by the arbitrage interests,” he adds. “It’s a demonstration of a board doing its job.”

The action caught some observers by surprise. “It’s certainly a questionable move,” says analyst Gregg Wolper of fund researcher Morningstar Inc. in Chicago. “It raises the question of what the election was for in the first place.”

The move by New York-based Alliance is puzzling because the company, which operates 14 closed-end funds with $3.3 billion, is viewed as one of the closed-end industry’s more pragmatic participants.

Alliance has open-ended four funds via conversions or through mergers in recent years. It also backed a plan in which the Austria Fund has repurchased a third of its outstanding shares since last fall, halving the trading discount to about 10%.

While closed-end fund managers tend to brand Mr. Olin and Mr. Goldstein as short-term profiteers, the two are pressuring fund directors and managers to make sure shareholder concerns are addressed. The growing institutional clout only helps their cause, and that could prove lucrative for small investors in closed-end funds.

“It has some benefit for the long term,” says analyst Ed McRedmond, with A.G. Edwards in St. Louis. “It has made fund companies and boards more aware of the discounts and performance, where there might have been some hesitancy to give it a great deal of concern in the past.”

Indeed, the average discount for closed-end stock funds has narrowed to 21% from 29% last September, says Barry Olliff, CEO of City of London Investment Management in Coatsville, Pa., which manages $700 million in emerging market closed-end fund investments.

“It’s not a smooth process,” adds Morningstar’s Mr. Wolper, “but at least shareholders are having a voice. The SEC would like to see more of that on the open-end side, with perhaps not as much noise.”