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Bram de Haas
Bram de Haas
Articles (457)  | Author's Website |

Activist Target With Upcoming Tender Offer and a 6.72% Annualized Distribution

The Brandywine Global Income Opportunity Fund is the target of an activist campaign which is rapidly narrowing its discount to net asset value

September 20, 2020 | About:

One class of interesting investments that I like to go over from time-to-time is closed-end funds. Every value investor likes a discount, and these overwhelmingly trade at a discount to their net asset value. Basically, you can usually buy a package of equities or bonds for 70 or 80 cents on the dollar. The downside is that the fees tend to be high. That's why I only tend to buy them if I like the underlying portfolio quite a bit, at a minimum think the firm managing the fund is capable and I usually buy them when the discount to NAV is relatively large relative to the historical discount.

Recently, I added the Brandywine Global Income Opportunities Fund (NYSE:BWG) to my portfolio. It is trading at an attractive discount to NAV of 9.6%. That's a sizeable discount given it is a fixed income fund. Its total expense ratio is just over 3%. That figure includes 1.10% interest expenses to enable the funds 33% leverage ratio. That means that for every three dollars invested, there is one that's due to leverage.

I'm not inclined to own a fund like this for long periods of time. I find it too expensive and risky in that sense. I really like this fund because it is the subject of an activist campaign by Bulldog Investors. Bulldog waged a proxy battle against the fund. A battle like that could have lead to the activist taking control of the fund and they really like to liquidate. That's the opposite of what fund management wants. This fund historically traded at a 15% discount to NAV, but its management company doesn't mind too much as long as it is generating sizeable fees.

In a closed-end fund investors can't withdraw only sell their shares. The consequence is that these funds tend to trade at large discounts. But if an activist gets control, let's say it takes them a year to wrest control away from management. The activist can then liquidate and that generates an instant 15% return. A 15% return on top of whatever beta or market return the portfolio generates. In case of a fixed income portfolio, with relatively low beta, 15% of alpha on that risk profile is fantastic.

In this case, there won't be a liquidation for now. Bulldog settled with the fund. Brandywine will execute a tender offer and buy back 20% of the shares that are tendered in time at a price per share equal to 99.5% of NAV on Sept. 23.

If one buys this fund and tenders all their shares, the fund is going to buy 20% of them at 99.5% of NAV, which should come down to a 10.5% gain. That also translates into a 2% gain on the entire position. That's nearly a 2% return on the entire position within a week. But that assumes the discount will not widen back out afterward, which could very well happen.

In addition, it is possible over 20% of the shares one tenders are taken out by the company because the cap is for 20% of all shares. Not every fund owner will have noticed, understand or even want to tender their shares. Consequently, it is possible a few more are taken out.

One other thing to mention is that there's a distribution this month equal to 0.5% of NAV. The ex-dividend date for that is Sept. 22.

One important reason for me to like this closed-end fund is that there are a lot of activists and CEF-specialists on the shareholder register. Its largest shareholder is Rivernorth Capital Management, Saba Capital Management and the earlier mentioned Bulldog Investments. But there's also an interesting credit specialist like Almitas Capital on the register with a sizeable position. Its investment principal Ronald Mass is very knowledgeable about closed-end funds.

Their presence is interesting because it increases the probability there will be continued pressure on management to close the discount. That should be fairly effective because a shareholder register like this, that's very knowledgeable about the space, is a constant threat to take the keys away unless management behaves in a very unitholder-friendly fashion. Saba has upped its holding according to its latest 13-F filing. It is conceivable another activist will continue where Bulldog left off.

On an annualized basis, the fund pays about 6.72% per annum through monthly distributions. More or less half of the fund is invested in government bonds. U.S. Treasuries are the largest single position. With Global in the fund name, it makes sense it is also invested in India, Brazil and Mexico, among other countries. There are also quite a few corporate bonds in the portfolio. In addition, there's a lot of cash likely because of the imminent tender offer. In terms of risk the fund holds, 18% are AAA bonds and 9% are AA bonds. About 50% of the portfolio is in BBB and BB-rated bonds and credit. 20% is in single B or lower.

I like the underlying strategy here quite a bit and especially like to piggyback on the activists present. The fund trades at a historically narrow discount, but that makes sense given the upcoming tender offer and possibility for further shareholder-friendly initiatives going forward.

Disclosure: Author is long Brandywine Global Income Opportunity Fund.

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About the author:

Bram de Haas
Bram de Haas is managing editor of The Special Situations Report and Founder of Starshot Capital B.V.

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