斗牛犬投资者：CEF活动家投资组合的更新

Bulldog Investors is one of the most active CEF activists. We track activist portfolios in order to find opportunities in discounted funds with potential catalysts.

Nuveen Connecticut Quality Municipal Income Fund is planning to merge with a nationally-focused affiliated fund. Bulldog plans to oppose the merger as planned.

Bulldog\'s activist campaign in Vertical Capital Income Fund has ramped up quickly.

Bulldog added new positions in Franklin Universal Trust and BlackRock Credit Allocation Income Trust. These funds may make value and income plays right now, but there is no obvious catalyst to close their discounts yet.

Bulldog Investors is an investment firm that, to paraphrase a Forbes headline, "bites bigger than it barks." Their general strategy is to buy closed end funds at a discount, and then engage with management to close that gap. A recent interview on Seeking Alpha provides some additional background. They also buy a lot of SPACs, but that's a topic for another article. Bulldog doesn't make headlines outside of their niche, but they have a massive impact in CEFs and SPACs.

Bulldog is one of the most active CEF activists. We track activists because they play an important role in unlocking value from funds that trade at persistent discount, and improving governance across the fund ecosystem. To quote the head trader of Bulldog Investors:

I further add that the external management model of most investment funds creates an additional source of possible conflicts in the absence of rigorous investor oversight.

At any given time, Bulldog has over 100 positions, and their turnover is relatively high. Typically, 40-50% of their portfolio is relatively concentrated, then there is a long tail of smaller token positions. They generally have a handful of activist campaigns in their most significant positions. In the search for potential ideas, I focus on 3 new closed-end fund positions with the largest dollar value accumulations based on their 13F and other public filings, along with another activist campaign that Bulldog launched during the second quarter.

Nuveen Connecticut Quality Municipal Income Fund (NTC) is a closed-end fund that invests in Connecticut municipal securities. The income it provides is exempt from US Federal income tax and Connecticut state tax. Muni funds like this are generally considered simple conservative investments for taxable accounts. Recent tax changes have been advantageous, although they also had the effect of making muni funds less cheap across the board.

This excellent writeup of Nuveen Municipal High Income Opportunity Fund (NMZ), an affiliated fund, provides more background on factors impacting muni CEFs generally:

NTC has earned a respectable 5.38% return on NAV since inception in 1993. Its 10-year and 5-year NAV and price returns are slightly above average for its category:

Source: CEF Connect

NTC is trading at a 7.59% discount, making it slightly more expensive than it has been historically:

However, its still cheap compared to NMZ, which trades at a slight premium. There is, of course, risk to being concentrated in one state, and Connecticut has its share of fiscal risks. Yet an investor can potentially buy a basket of discounted state focused funds to diversify themselves.

Of course, if management gets their way, NTC won't stay Connecticut focused for long. NTC is subject to a pending acquisition offer from the affiliated Nuveen AMT-Free Municipal Credit Income Fund (NVG). The number of shares in the new fund that NTC shareholders receive will be based on the NAV of NVG and NTC at the close of the transaction. The new fund will be a larger nationally-focused fund, so it may trade at less of a discount (NVG trades at around a 3.6% discount). Nonetheless, there are other consequences of the merger.

Since the acquiring fund is a national municipal fund rather than a state-focused fund, the surviving fund will no longer have the state tax break for Connecticut residents. Additionally, NVG has a broader mandate to invest in lower rated securities (it can put up to 55% of its managed assets in securities rated Baa/BBB or lower). Consequently, post merger, it may be less appropriate for Connecticut residents, or anyone concerned with overstretched municipal securities around the country.

This is where Bulldog investors comes in. Bulldog filed a 13D on NTC on June 10, indicating they owned 5.52% of outstanding shares. Their plan is to oppose the proposed merger with NVG unless the terms are changed. The 13D did not provide details on which terms it wanted changed.

We hold a bit of NTC as part of a broader basket of cheap municipal bond funds.

Vertical Capital (VCIF) is a microcap fund with a messy portfolio and complex history befitting of its 20% NAV discount. When I wrote about VCIF a month ago, I speculated that they might be an activist target eventually after listing, but underestimated how fast it would happen. Bulldog's latest 13D indicates they own about 8.96% of outstanding shares. Some of the total are owned by Bulldog funds, others by their executives personally. A lot of the retail investors who originally invested when it was non-traded must have sold their shares to Bulldog and its affiliates shortly after the IPO. This is the largest dollar value increase in a position that is publicly disclosed since 2019Q1.

VCIF invests in residential whole mortgage loans, usually loans with a history of borrower concessions such as extended maturity date or reduced interest rate. Alpha Gen Capital provides a great detailed summary of the current activist situation here. Basically, Bulldog wants to liquidate, and management wants to hang on. Management's response that they won't get full value in liquidation is in our interpretation either a ridiculous scare tactic or a rather startling admission of their valuation shenanigans.

Even valuing the portfolio conservatively, there is probably some decent upside left in it if Bulldog's proxy battle succeeds. Stay tuned for the shareholder meeting this autumn.

Bulldog added a new position in Franklin Universal Trust (FT) during the second quarter. The increase from 0 to ~$3.8 million in shares made it the largest largest dollar value increase in individual position in 13F. It accounts for around 1% of their portfolio and owns around 2% of the fund. They've traded in and out of small positions from 2015 to 2018. This new position is slightly larger than in the past.

FT invests in high yield bonds and utility stocks. As of the most recent semi annual report, 67% of its portfolio is in bonds, and 27% is in utility stocks, with the balance consisting of natural resource and materials companies, as well as some short term investments. FT invests in companies that have a history of increasing their dividends. Unfortunately, FT itself has decreased distributions over time.

Source: CEF Connect

Its annualized distribution based on NAV is currently 4.5%.

FT has mostly tread water the past 5 years. Its traded at a persistent NAV discount. The following chart from CEF Connect shows its price and NAV performance since 2014.

Source: CEF Connect

FT has still performed reasonably well compared to its peer group recently. According to CEF Connect, its trailing 1-year NAV return is 11.16%, more than double its category NAV return of 5.48%. This is decent by the steady standards of corporate bonds and utility stocks. However, its 5-year and 10-year track records are still below its category average.

Source: CEF Connect

Interestingly, Bulldog had a proxy battle with FT management back in 2008. They conducted tender offer in an attempt to get enough shares to control the board and convert the Fund to an open end fund. ISS and Glass Lewis were against them, and they ultimately exited without achieving their objective.

Buying at a 13% discount, then selling when it improves to mid single digits, collecting ~4.5% per annum in the meantime is one possible play for small investors here.

BlackRock Credit Allocation Income Trust (BTZ) has potential to be a similar story as FT from the activist investing perspective. BTZ's investment objective is to provide current income, current gains, and capital appreciation. It has a broad credit-focused mandate. As of the most recent public filings, about 75% of its portfolio consists of corporate bonds. It invests across the credit quality spectrum, mostly in the BBB/Baa and BB/BA area:

BTZ's Reference Benchmark is comprised of the Bloomberg Barclays U.S. Credit Index (50.36%), the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index (29.93%), and the Bloomberg Barclays USD Capital Securities Index (19.71%)

Its performance has been decent as measured by its own benchmarks. Its NAV return has exceeded all three of the key credit benchmarks.

Source: Semi Annual Report

In spite of this performance, it has consistently traded at a discount:

Source: CEF Connect

Bulldog took a position in BTZ in 2019Q2. It's still a small position (just under 1% of the 13F portfolio), and they own only a tiny portion of the fund. However, there are several other activist funds with significant positions. Saba owns just over 5%, and filed a 13D, indicating plans to nominate directors and take other steps to improve corporate governance. According to Whale Wisdom Karpus Management, Rivernorth, and 1607 Capital Partners also own significant stakes in the fund (although they trimmed their positions in recent quarters). If Bulldog and Saba continue to buy more shares and other activists stick around, they could push management into a settlement agreement, like a similar group led by Bulldog did in 2013 with a group of BlackRock Municipal funds, or take other steps to close the discount and improve corporate governance. This will be an interesting situation to watch in the next couple quarters.

I am/we are long NTC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.