Dec. 5, 2024
Dear Commissioner Peirce, It was a pleasure meeting with you last week. As a follow-up to the last topic of our meeting, I wanted to share additional information on the positive impact on closed-end fund activism for each shareholder. I remain available to discuss any of the claims made by ICI to the contrary, which are demonstrably false. Sincerely, Boaz Weinstein When we negotiate with a closed-end fund manager we almost always start by requesting a full-liquidity opportunity for all shareholders. In most cases that involves a conversion to an actively managed ETF. This conversion provides investors with identical exposures, lower fees, no tax consequences, and no discount to NAV. This year we agreed to the restructuring of numerous closed-end funds into actively managed ETFs. Examples: https://cef.tortoiseadvisors.com/press-releases/tortoise-capital-advisors-plans-merger-of-three-closed-end-funds-into-active-etf/ https://www.morningstar.com/funds/will-active-etfs-outnumber-passive-etfs Investor dollars have followed the rush of active ETFs—and out of traditional active mutual funds. From the beginning of 2019 through July 2024, investors moved $541 billion into active ETFs. Tender offers result from a manager’s desire to only offer limited liquidity to the fund’s shareholders. In a tender, the accretion occurring at a discount far outweighs the trivial increase in fixed costs. For example, if a $100 million fund were to conduct a 35% tender at 98% of NAV, $700,000 would be ‘given up’ by the redeeming shareholders. Spread out over the now $65 million fund, this is a 1.08% NAV gain to the remaining shareholders. i. The average operating cost of a closed-end fund is approximately 0.13%. Assuming half is fixed and half variable, that will mean an increase of operating cost by 0.04%, meaning the NAV accretion alone pays for 27 years of fees. ii. In addition to the NAV accretion, the increased share price from the narrowing discount to NAV, historically 3%-4%, pays for another 100 years of these increased fees! iii. Of course, the managers could just lower their fees by 4bps. Closed-end fund fees are ~2x higher than actively managed ETFs and mutual funds. iv. Additionally, the manager could choose not to waste shareholder money defending their own interests and fighting the will of their shareholders. If the discount to NAV returns post tender, it’s indicating a greater problem with the attractiveness of that fund (i.e., bad performance and high fees), and the Board needs to take real steps to address these, which they almost never are willing to do because of their coziness with the manager. In addition, we routinely ask managers to cap or lower fees going forward, which once again benefits all remaining shareholders. In a settlement we recently agreed to with the Federated Hermes Premier Municipal Income Fund last month, we were unwilling to agree to a tender offer without assurances they would cap the fees for remaining investors. The below was added to the standstill agreement: “Absent an unknown material event occurring, the fund's investment advisor does not anticipate that the tender offer will affect the fund's ability to continue to maintain its total annual fund operating expenses at no greater than 0.99%, consistent with the Expense Limitation.” Boards of closed-end funds have recognized the value of tender offers to self-police excessive discounts because, in Eaton Vance’s own words, “discounts may not be in the interest of shareholders”. For example, in four Eaton Vance closed-end funds (EVF, EVV, EER, and EFT) the below language is set forth in their prospectus: In recognition of the possibility that the Shares might trade at a discount to net asset value and that any such discount may not be in the interest of Shareholders, the Trust's Board of Trustees (the "Board"), in consultation with Eaton Vance, from time to time may review possible actions to reduce any such discount. The Board might consider open market repurchases or tender offers for Shares at net asset value. Thank you