DNI股价大幅折价但公司治理值得质疑

Dividend and Income Fund pays a 6.5% distribution and trades at a 22% discount.

Bexil Advisers became the investment manager in 2011 through a business transfer by paying Chartwell Partners over $4 million.

Corporate governance has not been good since then, and there have been four dilutive rights offerings.

Several closed-end fund activists are now shareholders: Bulldog, Saba and Matisse Capital.

At last year\'s shareholder meeting, a shareholder proposal to open-end the fund did not pass, but received a lot of support.

CEFConnect lists the inception date of the Dividend and Income Fund (NYSE:DNI) as June, 1998. But this is quite misleading. Back in 1998, the fund was formed under the name Chartwell Dividend & Income Fund. The fund mainly held convertible securities and traded under the ticker CWF. CWF had a fairly low expense ratio of 0.70%.

But on Feb. 1, 2011, Bexil Advisers LLC became the new investment manager via a "Business Transfer" by paying Chartwell Partners $4.325 million for the privilege of taking over the management contract. At the time, the fund had about $35 million in assets.

Bexil has since grown the assets to the current $190 million by doing four dilutive rights offerings. Bexil has also changed the investment mandate and after a few years raised the management fee considerably. The last reported baseline expense ratio in the semi-annual report was 1.52%, more than double what Chartwell used to charge.

DNI is currently a global balanced fund that currently invests about 95% in equities and the remainder in cash or fixed income. About 88% of the fund is currently in US equities. The fund's primary objective is to seek high current income. The secondary objective is capital appreciation. The fund uses a modest amount of leverage.

The fund's investment manager, Bexil Advisers LLC, is a subsidiary of Bexil Corporation (OTCPK:BXLC). Bexil is a very small firm, somewhat off the radar screen of Wall Street. Bexil owns about 9% of the outstanding shares of DNI, and considers the fund a major "profit center" for Bexil.

The fund is allowed to write covered call options to generate additional income, but they were not doing so as of the last report.

Since Bexil has taken over the fund in 2011, the corporate governance has been pretty bad. This may explain why the discount has consistently widened over time.

DNI has done the following rights offerings since Bexil took over the fund. They generally issue rights to purchase one new share for every three shares owned. Note the reverse split in 2012 that affected the market price level.:

After the last rights offering in 2018, the discount has never recovered to its average level in previous years. Over the last year, the average discount to NAV has been -23.33%, while it is currently -22.06%. The three-year average discount has been -20.22%. And the five-year average discount for DNI has been -17.49%.

Source: cefconnect

2) The Expense ratio went up after the last rights offering.

Normally, one of the main reasons given for a rights offering is to allow increased economy of scale and eventually lead to a decrease in the expense ratio. But the expense ratio for DNI actually rose 18 basis points from 1.34% in 2018 to 1.52% for the first half of 2019.

In the spreadsheet below, I break out the different categories of expenses for 2018 and the first half of 2019. I then doubled the 2019 expenses to get a projected annualized expense number for the full year.

While a few categories of expenses did go down, there was a whopping increase of 251% for Shareholder Communications. There was also an increase of 115% for custodian fees. The overall expenses rose by 24%. Management did not comment on or discuss these large increases in the shareholder report.

When a closed-end fund trades at a high discount, share buybacks are one of the best ways to add value for shareholders. DNI does have a Share Repurchase plan in place, but the fund did not repurchase any of its shares during the six months ending June 30, 2019 or for the full year 2018. This demonstrates poor corporate governance, since the fund's discount has been above 20% for most of this time period.

In December, 2018, DNI amended their fund policies to introduce a 4.99% ownership cap where no investor can own more than 4.99% of the shares outstanding without the Trustees prior approval. Here is the justification the fund used:

Phil Goldstein discussed this policy in the most recent shareholder report from the Special Opportunities Fund (SPE). and feels it is arguably illegal:

Source: cefconnect

Here is the asset allocation breakdown as of July 31, 2019:

Asset Allocation Breakdown

Source: Morningstar

Last 10 Years Annual Performance

DNI has below average long term NAV performance, but this is mainly due to the four dilutive rights offerings. For example, the last rights offering in 2018 caused an NAV drop of $0.52. An active trader who "traded around" the rights offering could have done much better. One trading strategy is simply to avoid the rights offering entirely by selling shares when the N-2 SEC filing comes out.

In some of the earlier rights offerings, investors were able to buy shares at 95% of market price. The long-term performance calculations normally do not reflect potential participation or over-subscription in the rights offerings.

DNI could be good as a swing trading candidate now because of the very high discount to net asset value along with its high distribution. Since inception, it had one big losing year in 2008 when the net asset value fell -45.69%, and it is also struggled in 2015.

Here is the total return NAV performance record since 2009 along with its percentile rank compared to Morningstar's Tactical Allocation category:

Equity Sector Weightings (as of June 30, 2019)

Source: Dividend & Income web site

Fund Portfolio Management

The main portfolio manager for DNI is Thomas Winmill, who is pretty much a one-man show. He serves as President, Chief Executive Officer, and a Trustee of the Fund and President, Chief Executive Officer, and General Counsel of the Investment Manager.

William Winmill, the son of Thomas, recently resigned from his role as assistant portfolio manager. Investor Relations said he was planning to attend Columbia business school.

There is a question as to whether William will return to Bexil after graduation or may decide to work for another asset management firm. If he chooses another firm, Bexil may be willing to consider the sale or liquidation of DNI, perhaps in return for some compensation.

Alpha is Generated by High Discount + High Distributions

DNI has a decent underlying portfolio, but there are really only two reasons to invest in DNI now -- the potential to capture "alpha" from the above high discount and the possibility of future shareholder activism.

The distribution rate of 6.65% along with the 22% discount allows investors to capture some alpha by recovering a portion of the discount whenever a distribution is paid.

When you recover NAV from a fund selling at a 22% discount, the percentage return is 1.00/0.78 or about 28.2%. So the alpha generated by the 6.65% distribution is computed as:

(0.0665)*(0.282)=0.0188 or almost 2% a year.

Note that this is more than the 1.52% baseline expense ratio, so you are effectively getting the fund managed for free.

Institutional holders hold about 40% of the shares.

Here are some activist investors (or institutional investors that would likely support them) that own shares in DNI are:

I quoted Phil Goldstein's comments about the unfair 4.99% Shareholder ownership cap above, and his "Stay tuned" comment may mean that Bulldog is considering future activist activity with DNI.

At the last shareholder meeting for DNI, Eric Boughton of Matisse Capital submitted a shareholder proposal to either:

The proposal did not pass, but it did attract a surprising number of votes given that Bexil owns over 9% of the shares outstanding -- about 1.12 million shares. Obviously, Bexil voted their own shares against the proposal.

Votes For: 1,779,277; Abstained: 430,986; Votes Against: 2,538,578

The shareholders who voted for the proposal are obviously disgruntled, and those who abstained are also not that happy with the current management. It would only take a small increase to push the disgruntled shareholder count over 50%.

There are currently about 4,000 investors who subscribe to Seeking Alpha Marketplace offerings related to closed-end funds. Many of these investors follow closed-end fund activists fairly closely and might very well support activist proposals on DNI in the future.

The Board of DNI may already be somewhat concerned about the large number of votes that supported Eric Boughton's proposal, and may decide to be proactive and take some shareholder-friendly actions before an activist like Bulldog or Saba steps in to try to get board seats.

Some possible shareholder-friendly actions might include:

Bexil may also decide to purchase more shares of DNI to make future activism more difficult.

Here are some summary statistics for DNI:

DNI is only a moderately liquid stock and usually trades with a bid-asked spread of about 2 cents. There is often limited size available on both the bid and asked, so care must be taken when trading DNI. If you use a market order, you will usually get some price improvement and receive a price somewhere between the bid and the asked price.

I believe that DNI is a decent purchase at current levels when the discount to NAV is 17% or higher. DNI can be a good holding for a shorter-term swing trader (hoping for the discount to narrow) or for a longer-term buy-and-hold investor.

Even if the discount does not narrow right away, the 7% distribution is a good way of receiving some of the discount each quarter. There is also a decent chance that a closed-end fund activist will soon make a move on the fund if the discount remains over 20%.

Before closing this article, I would like to quote an excerpt from "The Intelligent Investor" by Benjamin Graham that was published 70 years ago. Graham comments on some of the large discounts on closed-end funds at the time. It is amazing how little has changed since then!

I am/we are long DNI.

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.

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