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Parking Meter

June 19, 2015

Last August/September I had some extra cash just kicking around and decided to ‘park’ it somewhere that I expected would provide a small return but would be pretty safe for my principal. I posted two ‘parking’ ideas, Diversified Real Asset Income Fund (DRA) and Firsthand Technology Value Fund (SVVC). So how did the two ideas work out? The first, pretty much as expected, the other less well.

Diversified Real Asset Income Fund (DRA)
In a post last September I wrote about my rationale for ‘parking’ some funds in DRA. Part of my rationale was the prospect of participating in potentially 3 tender offers at or close to Net Asset Value each for 10% of outstanding shares. So how has the investment fared? After 9 months, 2 of the 3 tender offers have been completed, and despite a sell off in fixed income securities over the past 2-3 months, I have still come out ahead. Both the first and second tenders bought back about 15% of tendered shares as they were significantly oversubscribed. So, as you might imagine, with a significant investor like Bulldog trying to unload their position – but not being fully able to – the discount has not really narrowed significantly. It still stands at over 10%. I did purchase some additional fund shares in February, before the second tender offer, which turned out to be not a particularly propitious moment to increase my holdings, but overall, notwithstanding the negative developments in the bond market over the past couple of months, my IRR for this investment is just over 10%. Had I elected to sell just before the second tender offer my return would have been almost twice that. However, I still believe the fixed income market has over-reacted recently and that rates will once again subside when it become clear that the Fed will not be raising discount rates on the currently anticipated schedule. Clearly I am in the minority on this subject and, unlike most everyone else, remain in the deflationary camp. And therefore, yes, I’m holding my current position in DRA in the belief that the Greek problem (or perhaps the Italian, Spanish or Portuguese problem?) will eventually rattle the European financial infrastructure (and investors’ confidence), there will be a flight to the dollar and that will continue to put downward pressure on interest rates(perhaps even putting equity markets into a tailspin). But of course things will probably work out quite differently than I imagine, so I’m not beholden to my macro view. In the meantime, fund management has boosted the dividend, I believe mostly to reduce the discount (and thus make the 3rd tender unnecessary – its will only be done if the discount remains over 10%), which supports the price somewhat, and I’m getting a near 10% current yield on my investment.

Firsthand Technology Value Fund (SVVC)
Another Bulldog investment! Shares were selling at about a 20% discount to NAV when I bought last August (read about it here). My theory was that the agreement between management and Bulldog Investors would act as a catalyst to narrow the discount. The agreement was for SVVC management to sell their two largest positions, Facebook and Twitter, and distribute the profits to shareholders by a date certain, as well as repurchase up to 10% of shares outstanding. Well, the sales took place as agreed. The distributions to shareholders took place as agreed. The repurchase also took place as agreed. But guess what, the discount to NAV didn’t narrow, it WIDENED and significantly! Yep, that’s right, the 20% discount to NAV when I purchased has gotten BIGGER. At a recent price of $13.80 the shares are now trading at over a 45% discount! So much for my theory about the discount  Anyway let’s see where I stand. I purchased shares at $21.66/share and received 2 dividend payouts totaling $5.86/share in Nov./Dec. Then I was able to sell back 17% of the shares I held for 95% of NAV ($23.27/share) in January. With all of that, despite the widening discount, I’m still off only 6% on this investment, and as of now I plan to continue holding; a fund trading at 45% discount to NAV can only have good things happen (or can it?). With this kind of discount I believe the investment risks are overstated. If just one of the top fund holdings were to IPO I think the discount would narrow significantly. Also because Bulldog still holds a substantial investment in the fund, some 9.7%, I think there could be a repricing either when the Bulldog overhang is reduced (because they sell off their shares) or because there is another liquidity event.

Any thoughts from readers on these investments are welcome! As always, my meanderings are not meant to constitute investment advice; You should always do your own analysis before investing.

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3 Comments
  1. Jake Rothman permalink

    Sorry if this is a dumb question, but where do you get info on these? There is scant available data on Yahoo Finance, and my brokers doesn’t have much either.

  2. EDGAR and the fund managers’ websites (nuveen.com and firsthandtvf.com) are the best sources

  3. Dan permalink

    Big fan of closed end fund arbitrage situations and this blog (as I think I’ve said a million times before commenting):

    One situation that might be of interest to you is: GTU. GTU is a gold closed end fund. Third party tender offer by Sprott. It’s an exchange offer GTU for PHYS: NAV to NAV. $GTU is trading at a 5% discount PHYS is an ETF so doesn’t really trade at a discount. Can only effect the exchange if more than 66 and 2/3 of GTU vote to exchange. Downside protection because you can tender your shares back to GTU at 95% of NAV. Offer ends July 11th. Risk is the market risk associated with gold for about 2 weeks. This is kind of a backdoor “open-ending” arbitrage.

    I also invested in SVVC and got burned. Was also surprised by widening discount.

    A couple interesting BDC investments I’m involved in are: $CSWC which is spinning off a high quality industrial lubricants business but the main story is that it’s highly underlevered. The other BDC is MCGC which has agreed to be acquired by one company for around the current stock price but also has another bid by Phil Falcone’s HC2 for 11% higher.

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