It’s campaign season, and not just for presidential candidates. It’s also proxy season, when shareholders get to vote on proposals to change policies at the companies they invest in. Mutual funds are no exception, and the world of closed-end funds is often home to some epic battles.
Case in point: In dueling statements, Saba Capital Management and Nuveen are fighting over a proposal to extend the life of the
Nuveen Preferred and Income Term Fund
(ticker: JPI).
The two have battled before, with Saba generally accusing Nuveen of poor governance and restricting shareholder voting rights; Nuveen has fired back against what it calls Saba’s “obstructive actions,” which it says go against the interests of shareholders. In November, Saba notched a legal victory against the asset manager over what Saba said were “illegal” maneuvers to strip votes from shareholders.
In the JPI fight, Saba is asking fund shareholders to vote against a Nuveen proposal to cancel the fund’s Aug. 31 termination date. Nuveen’s proposal would allow shareholders to choose to maintain their exposure to JPI or tender up to 100% of their shares at net asset value (NAV).
Closed-end funds issue a fixed number of shares and thus can trade at a premium or discount to their net asset value. Like most closed-end funds currently, JPI trades at a discount (3.54% to net asset value as of March 22). That means investors stand to make about a 3.5% return on their money if the fund terminates at NAV or they tender their shares at NAV. There is essentially little difference between the two proposals for investors who want to exit the fund at NAV.
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Saba’s opposition has a couple of twists. According to Nuveen, Saba owns very few shares of JPI. Plus, it can’t even vote on the proposal itself. That’s because Saba bought shares of the fund after Jan. 19, the cutoff date for shareholders to be considered eligible to vote on the proposal. Normally activist investors build up large holdings in companies before trying to exert their might and stand to profit if they win the battle.
In a letter to Saba, Nuveen said it found Saba’s position perplexing because the proposal would benefit shareholders and provide them with a choice to remain invested in the fund if they wanted. The Nuveen letter also noted Saba had acquired only 1,000 shares, worth about $19,000 at recent prices.
“Obviously, Saba has virtually no economic interest in JPI and therefore Saba’s interests are not aligned with those of JPI’s other shareholders,” Nuveen’s letter states. “Based upon Saba’s actions, we do not believe it misunderstood the intended proposal, but rather has opted to use the weight of its hedge fund management operations to engage in harassing, obstructive actions to the detriment of JPI’s shareholders, which should be alarming to not only individual shareholders, but to other institutional shareholders as well.”
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Saba’s founder and CIO Boaz Weinstein said in a statement that the situation is ironic. “For Nuveen closed-end funds, they chose to set vote thresholds that make it impossible for shareholders to make changes, like open-ending the fund or replacing existing trustees,” Weinstein said. “Now, Nuveen is frustrated because these same standards prevent them from making the changes that suit themselves.”
Nuveen’s proposal requires approval by the holders of a majority (more than 50%) of the fund’s outstanding common shares. Abstentions will count as a vote against the proposal.
Actually getting shareholders to cast ballots is a battle in itself, says David Tepper, principal at Tepper Capital Management, a registered investment advisory firm in San Francisco. Many closed-end fund shareholders don’t follow the space closely, he says.
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‘Forefront of activism.’ Closed-end funds may not get as much attention as their open-end mutual fund and exchange-traded fund counterparts, but the funds are popular with some retirement investors seeking income. There were 414 closed-end funds with $255 billion in assets at the end of 2023, according to the Investment Company Institute, a fund industry trade group. More than half of closed-end funds were invested in bonds.
Many closed-end funds trade at substantial discounts because interest rates have risen, hurting funds’ ability to use leverage, or borrowed money, to boost returns. “The cost of leverage can be quite a bit more expensive than it used to be,” Tepper says.
Saba has said that some funds have been mismanaged and that it is a committed activist in the sector, with the goal of improving shareholder value and fund governance. Bloomberg News reported that almost 70% of Saba’s $5.6 billion in equity assets were in closed-end fund positions as of December.
“Saba has clearly been at the forefront of activism,” Tepper says.
Saba has taken on other asset managers, including
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buying shares of closed-end funds, and then taking additional actions such as pushing to elect new boards of directors and converting closed-end funds into open-ended funds. Its activism has also brought it into previous conflicts with Nuveen, which has 45 closed-end funds.
Saba’s conflicts sometimes spill over into the courtroom. In 2021, Saba sued Nuveen and trustees of several of the asset manager’s funds, accusing them of wrongfully stripping voting rights from shareholders by limiting the ability of shareholders with holdings greater than 10% of assets to vote any additional shares purchased. Nuveen moved to dismiss the lawsuit. A federal judge ruled in Saba’s favor. Nuveen appealed, but a federal appeals court upheld the ruling in November.
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At the time, Saba’s Weinstein praised the decision. “The court’s ruling is a victory for shareholders who have suffered at the hands of hypocritical, self-interested fund managers like Nuveen,” he said in a statement. He also said that the funds’ trustees should resign immediately.
Some of JPI’s board members are also board members of other funds targeted by Saba’s lawsuit.
JPI had $674 million in assets as of Dec. 31. The fund, which was formed in July 2012, seeks to provide income and total return and invests most of its assets in income-producing securities, with a focus on preferred shares, which are usually issued by financial and insurance companies. Like many closed-end funds, JPI uses leverage to boost its yield, currently just over 6%.
Nuveen says shareholders would benefit from extending the life of the fund because they could maintain exposure to the strategy and defer the realization of taxable gains that would result from liquidation, according to a Feb. 26 filing by the asset manager. In addition, Nuveen would waive management fees or reimburse expenses in an amount equal to 50% of the fund’s management fee.
Saba is urging shareholders to vote against the proposal due to the fund’s “poor track record” on shareholder voting rights and other issues, according to a proxy statement the firm filed March 4. “We do not believe that the fund, in light of its corporate governance history, should be extended beyond its originally anticipated term.”
Nuveen and Saba have made their cases. If enough votes come in by the fund’s annual meeting on April 12, we’ll find out what shareholders have to say.
Write to Andrew Welsch at andrew.welsch@barrons.com