NUVEEN, AFTER SIX YEARS ON SIDELINES, IS RELOADING CLOSED-END MUNI ARSENAL: 3 NEW FUNDS TO CARRY SALES LOADS OF 4.5%

Frustrated with the less lucrative economics of peddling new closed-end funds without a sales load, John Nuveen & Co. will try to turn back the clock this month by launching three closed-end muni funds that carry 4.5% sales loads.

It’s been six years since Chicago-based Nuveen launched its last closed-end municipal bond fund. Between 1987 and 1994, it raised some $25 billion via such IPOs as well as secondary offerings.

But it has sat out a two-year-old rebound in the sector while Merrill Lynch & Co. Inc. has raised more than $2 billion in new offerings. Even the relatively small Eaton Vance Corp. sold $615 million in new closed-end muni funds in January.

Salomon Smith Barney Inc., Paine Webber Group Inc., Prudential Securities Inc., BT Alex. Brown Inc. and Gruntal & Co. LLC this week began pitching three Nuveen Dividend Advantage Municipal Funds to be priced later this month.

In launching the new funds — national, New York and California portfolios — Nuveen is testing a new fee structure that offers above-average fund dividend payments by means of a temporary partial waiver of advisory fees. The funds’ higher yields are aimed at minimizing the trading discount closed-end funds are likely to suffer after paying out 4.5% in sales commission fees.

So far, the current resurgence in closed-ends has relied on a less profitable sales scheme in which fund sponsors pay broker sales commissions out of their own pockets and then recoup those costs by raising advisory fees. (InvestmentNews June 8, 1998). Fund sponsors leaned on the notion that eliminating loads on closed-end fund IPOs would reduce the chances of the fund trading at a discount after underwriters stop supporting the offering price in the secondary market.

Closed-end funds issue a fixed number of shares that trade on a stock exchange. They can trade at a discount or premium to the net asset value of the underlying securities.

Nuveen executives have been aching to capitalize on the recovery in closed-end IPOs, but the extra cost of fronting loads — along with a recent Financial Accounting Standards Board rule revision requiring closed-end fund sponsors to charge such costs against earnings in the year they are paid out rather than amortizing them over several years — kept it and others on the sidelines.

Investment bankers have tried to drum up interest among closed-end fund sponsors to get around the earnings hit by offering factoring deals in which the investment banks would purchase rights to a portion of a fund’s annual advisory fees in exchange for upfront cash to cover IPO commission payouts.

“There are questions whether that approach will pass accounting muster and not require the immediate expensing of those costs,” says a Nuveen spokesman. “The lower net fees and expenses for the funds will provide more investment income and should have the effect of enhancing the yield. Our analysis suggests a positive correlation between dividends paid and share price.”

“What Nuveen has come up with is a very clever way to deal with the accounting issue, but I don’t see how it’s going to trade any better,” says closed-end fund analyst Paul Mazilli of Morgan Stanley Dean Witter & Co. in New York. “People look at two things when they rate funds — yield and discount. The funds trading at a premium among leveraged muni bond funds are primarily older funds that have higher coupon bonds with decent call protection.”

For Nuveen Dividend Advantage funds to match their planned initial $15 offering price, the shares would have to trade at a 4.5% premium in the secondary market. Leveraged funds with at least $100 million in assets trade at an average 2.6% discount, according to Mr. Mazilli.

states case to sec

In a preliminary filing with the Securities and Exchange Commission, Nuveen says an analysis of national closed-end muni funds issued between January and March shows that funds paying higher dividends trade at higher market prices.

Under the Dividend Advantage structure, Nuveen will waive 0.3% of its fees and expenses for five years, increasing the amount of income available for dividends. The waiver declines 0.05% each year thereafter and disappears after July 2009.

Nuveen expects total annual expenses of its three new funds won’t exceed 0.55% over the first five years and 0.85% by the time fee waivers end. That compares to an average of 1.1% for non-proprietary no-load muni funds launched in the last five years, according to Lipper Inc.

“Nuveen has a good name and Salomon will sell it, but I’d rather buy an existing fund that is trading at a discount,” says Mr. Mazilli.