A case for shareholder activism
posted on
Oct 18, 2010 10:37AM
Last January, I highlighted DWS REEF World Real Estate Fund (DRP: 19.47, -0.01, -0.05%) as a contrarian, off-the-radar screen value: a dividend-paying closed-end-fund then trading at a 17% discount to its underlying net asset value. Four mother later, its shares had jumped sharply, narrowing the discount to 11%, but I stressed the importance of sticking with the winning trade. As it turned out, I was right – but only because a concerned shareholder did the right thing.
Unbeknownst to me, the DWS REEF World Real Estate Fund had also attracted the attention of Western Investment, an activist firm known for shareholder advocacy at closed-end funds like DRP. Western creates value by putting their money where their mouth is, buying large stakes in funds with incompetent management and pushing for reform. Soon, Western was the fund’s largest shareholder, and push is exactly what they did.
In proxy contests and press releases, Western relentlessly lambasted DRP’s board as having “failed the Fund’s stockholders,” citing “unacceptably steep discounts to its net asset value” and a “do-nothing strategy.” They pointed to how investors had lost considerable sums even as fund directors received substantial fees. Often colorful and curt, Western called the fund’s management “a disgrace to the free market system and an insult to democracy itself.”
When Activists Attack
DWS REEF World Real Estate Fund (DRP) – 6 months
It worked. Earlier this month the fund’s board agreed to merge DRP into DWS RREEF Global Real Estate Securities Fund (RRGAX), an open-end mutual fund, meaning that the wide discount at which DRP has long traded would shut. The fund instantly leapt 10%. It is now trading 30% above the level at which Western first began pushing for change and 40% above the level at which we first presented the bullish case.
Investors in DRP, of which I remain, owe a debt of gratitude to Western, without whom the discount would have unquestionably remained. It’s another win for the firm, who has boosted shareholder value in 32 different campaigns since 2004 – they keep a virtual scorecard at FixMyFund.com.
Oftentimes, the events that most impact our trades aren’t at first always clear from the onset. Although the fund’s deep discount and Asian allocation initially attracted my interest, it took a profit-motivated investor I had never even heard of, let alone compensated, to motivate a dilatory management to put shareholders first.
One of the privileges of stock ownership is the ability to vote in company elections and agitate for change. Yet 87% of individual investors throw away their proxy statements, which is unfortunate considering how – as Western’s gutsy activism demonstrates – those votes directly impact how companies and funds are managed. Keep that in mind the next time you toss a company’s proxy statement without bothering to vote your shares.
At the time of writing, Hoenig’s fund held positions in many of the securities mentioned.