THE PAIN IN SPAIN TIED MAINLY TO THE REIGN — BY DISSIDENTS OUT TO AX ADVISER ALLIANCE: CLOSED-END FUND’S TRADING AT A DISCOUNT AS BENCHMARK SOARS

Count Spain Fund Inc. among the closed-end funds under siege by dissident shareholders.

Ron Olin, a shareholder and president of Deep Discount Advisors in Asheville, N.C., has filed a proxy proposal to fire the fund’s adviser, New York-based Alliance Capital Management Corp., and solicit competitive bids for a new one.

Shareholders will vote on the proposal at the fund’s annual meeting next month. If it gets a thumbs up from holders of more than half the outstanding shares, it is binding under a Securities and Exchange Commission decision handed down in May. But even Mr. Olin concedes that attracting such support will be extremely difficult.

Mr. Olin and fellow activist Phil Goldstein, a hedge fund manager out of Pleasantville, N.Y., have taken on the boards of a number of closed-end funds, mostly country funds, that suffer from nagging discounts.

Both men invest in funds trading at large discounts and then rally shareholders to push management to narrow the discount, often by converting to an open-end format. As of July 31, Spain Fund was a prime candidate for their attentions, selling at a 15.33% discount to net asset value.

Mr. Olin, an adviser with $200 million under management, argues that the fund’s returns have been poor relative to the Spanish market. The Morgan Stanley Capital International Spain index was up 52.09% on the year as of July 31, while Spain Fund’s net asset value was up 47.57% on the same date and its market value was up only 39.59%.

Morningstar Inc. reports that the fund traded at an average discount to net asset value of 19.7% last year and of 19.3% in 1996. This year’s average discount into last week had improved to 15.81%, according to Bloomberg News.

Mr. Olin also contends that directors, who “owe their positions to the adviser,” haven’t taken adequate steps to narrow the fund’s discount because moves such as open-ending and share buybacks would reduce assets under management and advisory fees as a result. The fund’s board has come out against the proposal to replace Alliance.

Shares of closed-end funds are finite in number, and trade on exchanges like those of any corporation. If the funds’ investments perform well, their net asset value rises, just as with open-end funds, but the law of supply and demand can cause the stock to trade at a discount or a premium to underlying net asset value.

Mr. Olin uses Spain Fund’s market return, rather than its net asset value return, to bolster his case that it has performed badly on a relative basis. In his proposal, he points out that the fund had a market return of 71% from inception through Dec. 26, 1997, underperforming the Morgan Stanley Spain index’s 159% gain during that period.

In from the start

“The shareholders have not done well with these (closed-end country) funds,” says Mr. Olin, who has been a Spain Fund fund shareholder since its start in June 1988.

“They’ve been cruddy investments, and that deserves some airing and some publicity. This (proposal) is a really inexpensive way to communicate with the shareholders and get them to think about their investment a little bit,” he adds.

In its statement to shareholders, Alliance contends that “it’s almost absurd to suggest,” as Mr. Olin does, that the firm’s chief concern is maintaining revenues from advisory fees.

“This contention,” the statement says, “overlooks the fact that Alliance has approximately $250 billion under management. The fund’s total assets of $226 million (amount to) only 0.0009% of the total net assets under Alliance’s management.”

Alliance also points out that it recommended the “managed distribution policy” that was adopted by directors last December. Under the policy, the fund distributes to shareholders the value of at least 2.5% of its net assets quarterly.

“Managers should be judged on the value they have added to the portfolio in terms of NAV return,” the statement reads. Over the two years ended last Dec. 31, the fund’s cumulative net asset value return was 74%, compared to 67% for the Madrid General Index, Alliance says.

Gregg Wolper, a closed-end fund analyst at Morningstar, agrees that managers should be judged by net asset value return. He notes that the fund trailed the Morgan Stanley index for the three- and five-year periods largely because it has more small-cap holdings than the index and performance has suffered as a result of currency hedging decisions made a few years ago when the dollar was weaker.

The fund returned 63.10%, 37.37% and 28.08% for the 12-month, three-year and five-year periods, respectively, through July 31, according to Morningstar. The Morgan Stanley Spain index gained 67.34%, 41.32% and 32.38%, respectively, for the same periods.

“One camp would say that stock prices trade in the free market and are based on supply and demand for the shares and there is not that much the fund can do about the share price,” says Mr. Wolper.

“But the other side, which is where Mr. Olin and many other shareholders fall, says that the fund should look to the shareholders’ well-being and do whatever they can to boost the share price.”

So far, dissidents like Mr. Goldstein and Mr. Olin have achieved mixed results. Mr. Goldstein, for instance, succeeded in getting shareholders of the Emerging Mexico Fund to pass his proposal — which is merely advisory — to make it open-ended, but he failed to get enough votes to back a proposal to fire its adviser, Santander Management.

So far, neither has been able to muster enough votes to back a series of shareholder proposals calling for the ouster of closed-end fund advisers. That’s why all eyes next month will be on Spain Fund.