Bulldog Investors On Activist Investing
Rajeev Das, head trader at activist investing hedge fund Bulldog Investors, talks activist investing at NYU. Here are the interview highlights. Don't forget - sign up for our free daily newsletter to stay in the activist investing know.
How did you decide upon the name, Bulldog investors? As we understand, many Special Purpose Acquisition Companies (SPACs) now incorporate a “bulldog” provision – preventing any investor from holding more than 10% of the shell company to exercise conversion rights. Seems like Bulldog investors was a pioneer in such transactions. Is this where the name is derived?
We had Bulldog investors first, before they inserted this provision. Bulldogs are pretty tenacious and stubborn, and in the activist segment, one has to be that way. So, after a lot of thought, we chose this name. I think it describes us pretty well – what we do and how we are, as far as the mindset goes. Regarding the SPAC provision – yes, this is because of us. In the first batch of SPACs, before the financial crisis, if a certain number of shareholders voted against the transaction and asked to redeem the money, the transaction would not go through. So, that’s why they put the provision in there. You cannot vote more than a certain number of shares against a transaction. It is typically 10%, but it can vary. Regarding current SPACs, you can actually vote for a deal and get your money and the transaction will go through.
Can you please briefly explain the focus of your funds? What is the investment strategy? How is it different than other activist funds?
We are value activists. We are looking to buy assets at a discount to their value, which can be either their NAV (Net Asset Value) for a closedend fund, or it can be a discount to their private market value. But what we really have to be sure about is that the “value” is there. So, we look for companies that we can really hang our hat on, as far as the value is concerned. We try to avoid turnaround situations. I think that’s where we differ from a lot of activists. I think we are also the only “real” activists in the closed-end fund space; there are few others that do share proposals and things like that. We are the only ones that go full out for things like proxy contests in the CEF (Closed-end Fund) space. We also look at generating alpha over an asset class. So, for example, if you look at SPACs, and look at the underlying assets, that’s mainly US treasuries, which are yielding nothing. If we can generate return of 600-700 basis points over that asset class, without practically taking any risk, that’s phenomenal.
How has your journey been from graduating from NYU to the current role of “Head of Trading” at Bulldog Investors?
When I first got into this business, I was on the retail side. This was even before NYU. So, I worked at Lehmann Brothers. I worked at Smith Barney, primarily with high net-worth individuals on the retail broker side. From there, I moved to what’s called the mid-office. Worked with a couple of brokers, primarily doing a little bit of everything. I moved to Bulldog in mid-1997 and that’s also when I started grad school. I initially started on the operational side and then I moved to trading and research and things like that. So, I know pretty much the entire business.
You have covered quite a few funds in your career – the Mexico Equity and Income Fund, and then the Special Opportunities Fund. How has this experience been in terms of changing focus, investment analysis and learning?
I am still on the board of directors of the Mexico Equity and Income Fund. We bought this fund in the late 1990s and early 2000s, when it was trading at about 70 cents on the dollar. We accumulated a small percentage of the fund and launched a proxy fight. Oppenheimer ran it at that time and they were doing absolutely nothing as far as the discount was concerned. The portfolio was managed by a company in Mexico which still continues to run the fund. Our problem was with the discount. Once we got control of the fund, we got on the board. We did a tender offer and allowed all shareholders who wanted to get out to do so - the fund shrunk from over $100 million to roughly $20 million. We were able to grow the fund organically and also did rights offerings, and the performance has been great. Pichardo Asset Management in Mexico runs it, and they have been outperforming the Mexico market for around 20 years now. Pichardo has been doing a great job. It is a very well run fund and a great exposure to Mexico if that’s what you are looking for. And with us on the board, we have been able to keep a check on the discount. We are very proactive and very open to hearing from other shareholders, and doing what they want. The shareholders own the fund, and that’s what I think most companies tend to forget. The Special Opportunities Fund was actually a municipal bond fund that was run by UBS Global Asset Management. Again, it was trading at a huge discount. The board was not staggered, and so you could gain control over the board with one proxy fight. We accumulated probably about 5- 10% of the fund at a double-digit discount and we got control of the board. Once we got control of the board, we allowed everybody who wanted to get out to get out, and then we changed the mandate of the fund. Now we use the fund as a vehicle to buy other discounted assets.
Have you seen any major change in this industry since you joined in 1997?
There are more activists now, especially in the last couple of years. I don’t think of “activism” as an asset class. We see it as a strategy, which you can use in a closed-end fund, in an operating company, or anywhere the opportunity arises. In the closed-end funds space, discounts aren’t as wide as they were back in the 90s and that’s primarily because of activists. I think now the fund companies know that if they let this discount linger, people are going to buy in. As a result, you are no longer seeing those wide discounts, but at the same time, even with narrow discounts, you are taking less time to close that gap, so the IRRs are still pretty good. I think slowly people are realizing that with modern corporations there are principal agent problems, and there are managers that don’t own stock in the companies they run, so there will always be room for activists. Managers and corporations tend to do what’s in their best interest, and this is not always aligned with shareholder’s interests, so there will always be room for activists unless the structure of the firm changes.
Your most recently filed 13F shows that you increased your exposure to Real Estate to 24%. What attracts you to this sector? What is your current view on the sector?
As far as making macro calls, we are agnostic and don’t do that. In real estate, we own two closedend funds. One is a fund run by Legg Mason. The ticker is RIT and we own over 20% of that. We bought in about a year ago. We have since nominated three people to the board. We asked that they take actions to reduce the discount, but they really didn’t do anything. At the shareholder meeting, a quorum wasn’t reached. In such a situation, the directors that are currently on the board hold on for another year. However, this didn’t stop us from continuing to buy, and I think Legg Mason saw that. They understood that this year we have three directors, and next year six, and ultimately, we will have control of the board. So, they came back to us and said that they will open end the fund in first quarter of 2016. You can buy now at a 5.5% discount and there is a 1% fe to get out - you are talking about net 4.5% discount closure in about 5 months and you can completely hedge it. We end up with about a 10%+ IRR with minimal risk.
That sounds interesting. So, I read on your website that you try to avoid “value traps”. Can you please elaborate on that?
Absolutely. When we are looking for discounted assets, we are not just looking for things that are cheap - you have to identify a catalyst to close that discount. There are plenty of closed-end funds trading at a 20-25% discount that we won’t even touch because we know that there’s no way to close the valuation gap. Sometimes the management is really stubborn and they have destroyed all the assets so that they can protect themselves or there is just not enough support from the shareholders. So, we really want to avoid that situation. I mean, I would rather buy something at a narrow discount and close that gap quickly and continually repeat that process.
You also bought a sizeable stake in the Nuveen Long/Short Commodity Fund last quarter. Any particular reasons to select this fund?
Well, the Nuveen Commodity fund is interesting. It’s actually not a fund, but a commodities pool that trades like a stock. I think Nuveen first brought this out in 2011 and it traded at a premium briefly and then started trading at around a 20-25% discount. I think it was some kind of embarrassment for Nuveen, only at $250- 300 million and trading at 80 cents on a dollar, s they decided to convert it into an ETF. We started buying this early, at an average discount of around 5%. This was a long-short fund, so there was very little market risk. If you look at its YTD October performance, I think the NAV is down around 1.5-2%. If you look at other commodity ETFs like GCS, I think that’s down around 20%. The only issue has been that they were supposed to convert it into an ETF in the fourth quarter of 2015, but it’s been pushed to next year, which affects IRR. However, it’s still a great IRR if you do that math - you can buy it today for a 5% discount with no market risk and hold it for 4 months with NAV performance much better than other ETFs.
Your current biggest holding is Stewart Information Services Corp. (STC), where you hold more than 10%. How did you select this investment?
I think we invested in a solid company. STC is in title insurance, which is a great business to be in. They were trading at a discount relative to peers mainly because they had to improve operationally. Also, they had a lot of capital, which we asked them to give back to the shareholders either through share buybacks or as dividends, which they have been doing. Our average cost basis on Stewart is around $32.50, and the stock is currently at $43. They recently increased the dividend to around $1.2, which is the highest that they have paid out, I think, since 2007. They also just announced another buyback. What’s really keeping the stock down is the dual-class structure. You have a small number of shares controlling a large number of votes. Last year, we launched a proxy fight and now have a representative on the board. This year we have decided to submit a proposal to shareholders asking them to get rid of the dual-class structure, which they will not oppose. Generally, when we submit a share proposal, the firm will send out several mailings to the shareholders asking them not to vote in our favor, saying that we (activists) are bad, that we are arbitrageurs. STC has agreed not to do that and to let the shareholders decide. If this happens, it could be a $50+ stock. But again, it’s a company with solid assets and that’s what we liked. In terms of idea generation, for Stewart, there was another value investor who was a large holder who contacted us, that’s one way. Then there are people who are stuck in a “value trap” and want us to help get them out - that’s another way to generate ideas.
You seem to focus on investing in mainly SPACs and also in small caps opportunistically - can you tell us why you like them, compared to mid or large caps?
Well, SPACs have been around for a while. They were called “blank-check” companies and had a pretty bad reputation. When you invested in SPACs earlier in the 1990s, there were no safeguards around your investments like those we have today. Now, if a SPAC announces a deal that you don’t like, you can get out. For example, the SPAC will issue $200 million of shares at $10 a share, giving investors one share and one warrant. The money from the IPO will go into the trust, which will be used to fund the deal. When the deal is announced, you have two options – you can continue to stay in the new company or you can get your $10 back. Meanwhile, you also have that warrant which you can sell. If it’s a bad deal, the warrants will be worthless, and you can get your $10 back. If it’s a good deal, the shares will trade above the trust value and the warrant will pop. And you can make 10-15% on your deal. So, really you have no downside in this investment. SPACs put their money into US treasuries and you can easily get mid-to-high single digit IRRs. It’s really a great investment when compared to the risk you are taking. We invest in small-caps because this is where we can be effective. We can buy a meaningful stake, bring people on board, and bring about change. With the amount of capital we manage, there’s really no point in buying large cap companies.
Please share an example of an investment that went very well - the key takeaways and what steps you took to ensure success?
One area where we’ve had a lot of success, it’s a little off-the-beaten path, is auction rate securities. Closed-end funds are allowed to use leverage unlike open-ended funds. They will raise debt and issue auction-rate securities. Auction rate securities are vehicles where the interest rate is set weekly. If you bought these debt securities and you want to re-sell them, you can put these out for auction. Pre-2008, these auctions were failing because there weren’t enough buyers. So investment banks would step in and provide liquidity (take the other side of the trade). In 2008, the market totally froze when the investment banks stopped propping up the market. These AAA securities were, by statute, covered by closed end funds that had to maintain asset coverage of 200-300% for these debts, so the investments were supposed to be very safe. If there was any problem, the fund was required to sell its shares and pay back these investors first. The market froze when suddenly nobody was buying them, and these securities started trading at 70-75 cents on the dollar. That’s where we started buying. In September of 2014 we were able to buy auction rate securities issued by a muni bond run by Alliance. It is called Alliance New York Municipal Income fund (ticker AYN). We bought about 52% of outstanding auction rate securities, and, by statute, preferred holders of closed-end funds hold two seats on the board. We simultaneously bought common shares, which were then trading at about 85 cents on the dollar. We had a holding period of ten months and were able to get full NAV on the auction rates and on the common. On these auction rate AAA-rated securities, we had an IRR of over 20%.
Why did you choose to work in activist investing? What lessons did you learn before deciding to immerse in this investment style?
We didn’t actually want to be activists, but after buying closed-end funds so many times at 70 cents on the dollar, waiting five years, and having the shares still trade at 70 cents on the dollar, I thought it was time to do something. So, we decided to do a proxy fight. The first proxy fight that we did was back in 1998. Everyone thought it would fail as nobody had ever done it. We were the first ones to do it, and we were successful, and so we continued doing it.