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Added a small position in Firsthand Technology Value Fund (SVVC)

August 29, 2014

I’ve been thinking about closed-end fund investing ever since I discovered the Special Opportunity Fund run by Phil Goldstein. I find the theory of the fund theoretically attractive; if you invest in a basket of closed-end funds trading at historic discounts, then approach managements in these funds and demand some event that will narrow or close the discount such as a buy-back or dutch tender, if you’re successful you should be able to generate market beating returns. There are some practical problems with this approach, such as intransigent management and closed end funds whose performance is worse than the overall market during your holding period, which unfortunately can’t be overlooked. There are other problems as well, such as being an activist of sufficient size to get management’s attention or having a diverse enough portfolio to mimic the market’s underlying movement.

I actually did some closed-end fund investing initially for a reason other than the play on the discount to NAV. Last year in November I noticed that most fixed income funds, primarily those invested in municipals and mortgage-backed securities had had a terrible year. The underlying investments tumbled in value in the May/June timeframe when it looked like quantitative easing was about to be cut short. Funds invested in these sectors magnified the results of the underlying securities because the funds 1) tend to be leveraged and 2) traded from premiums to, in some cases, double-digit discounts. In other words they got clobbered. I like to be contrarian, and I thought the sell-off was overdone. So I did some homework and picked a couple of funds that were in the Special Opportunity Fund portfolio (you need someone to the do the dirty work for you, and, as Monish Pabrai says, one of the best ways to successful investing is to lift the ideas of successful investors). As luck would have it, what I had thought was an overreaction turned out to be just that, and the market for municipals and (to a lesser extent) mortgage-backed securities recovered this year with the result that closed-end funds invested in these sectors have done well, though discounts have not shrunk as much as I might have anticipated. As an added kicker for me, the municipal fund I chose was one of the funds coming under a standstill agreement between Bulldog Investors (Phil Goldstein’s management firm) and the fund’s manager. Under the agreement the fund will be tendering for up to 10% of the outstanding shares at 98% of NAV in the near future. When I purchased the shares they were trading at an 11% discount to NAV, so the more shares of mine that get taken under the offer the better. How well will I actually do? I don’t know yet as the tender isn’t over so I don’t know how many of my shares will be accepted. Worst case, if all shareholders tender all their shares (a very unlikely event), I will have 10% of mine accepted at 98% of NAV and can sell the balance into the market after the tender. Even in that case I will still do alright because the fund’s shares have appreciated by over 10% this year, as well as paying out a 6% tax-free dividend. However, there’s a lesson here; if the fixed income market had moved against me, despite the tender, I might have been looking at an overall loss here rather than a gain; the tender enhanced my gain but couldn’t outweigh the effects of the market over a year-long holding period.

So what does this have to do with the Firsthand Technology Value Fund (SVVC)? Not a lot except that the Special Opportunity Fund also has a significant investment in SVVC. Firsthand has had a miserable performance record under the stewardship of the current manager, Kevin Landis.  When the fund shares fell to a 20%+ discount to NAV several years ago Bulldog Investors stepped in, took a large position for several of their accounts and pressed for a liquidity event. With the threat of Bulldog running a slate of directors at this year’s annual meeting  the manager buckled under and signed a standstill agreement with Bulldog last March.  That agreement called for a payout of some capital gains and a tender offer. As of July 31 the fund had total net assets of $257 million, or $28.28 per share. Shares are now trading at $22.60, so based on NAV at the beginning of August, shares are currently trading at around a 20% discount. Of course this isn’t an exact calculation because we don’t know exactly what the NAV has done so far in August… but the market in general is up and therefore so should the net assets of the fund. It should also be remembered that SVVC is a strange creature because it has both public and non-public investments, something mutual funds rarely have. However their largest positions are in Twitter (22%) and Facebook (17%), shares which they acquired before the respective IPOs. In the standstill agreement, the fund’s manager has agreed to sell these shares by Oct 31 and Sept 30, respectively, and distribute any net realized gains to shareholders by year-end. This will shrink the size of the fund somewhat (thus increasing the discount to NAV). They also agreed to launch a tender offer for up to $20 million worth of the outstanding shares at 95% of NAV in the 4th quarter. They further agreed to a $10 million share buyback program if shares continue to trade at less than NAV. You may ask ‘what’s happened to these guys? have they suddenly got religion?”. I can assure you that this is not the case. They simply want to continue collecting the management fees they have so far been collecting for doing such a lousy job. I’m not sure how all this will pan out for me as it depends on what the market does between now and Oct 31, but I like the share’s sizeable discount to NAV and the several catalysts on the near-term horizon. My hope is that the payout and tender offer will reduce the discount significantly and result in a 10% to 20% return on my position by year-end.

A reminder that the above is not investment advice and you should always do your own analysis before investing.


note: This post is for Dan who asked about my interest/activity in closed end funds.

  1. CEFs are a great way to place contrarian bets; the only thing better than owning a beaten down, unloved asset class is owning it at 90 cents on the dollar. I bought GGN, IHD, NZF, NUV and others late last year and they’ve been some of my best performers YTD. There’s a nice seasonal component to CEF discounts that makes for great holiday bargain shopping.

    SPE is also a core holding of mine. When it comes to agitating for change and managing discounts, I’m content to pay a reasonable management fee to Goldstein and co. to let them do the heavy lifting on my behalf.

  2. Is there any need for hedging if we only bet on the discount to narrow?

    • I’m not sure you can really hedge a position in SVVC; though Twitter and Facebook make up almost 40% of the fund (and these positions could be hedged though you don’t know when in the next 2 months they will be liquidated), the balance of the fund is primarily in private equity positions. These can’t really be hedged. I’m just looking at this as a place to park some funds for the next 3 or 4 months, but funds I am willing to put at risk, not like money market funds (which I think are really more at risk than anyone currently believes).

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