University of Minnesota Twin Cities Opportunity Patterns Discussion

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9-208-097
REV: JULY 3, 2008
ROBIN GREENWOOD
JAMES QUINN
Opportunity Partners
On September 15, 2000, Phillip Goldstein, principal and cofounder of Opportunity Partners, sat at
the boardroom table with four other directors of the Mexico Income & Equity Fund (MXE). Goldstein,
whose hedge fund Opportunity Partners held $47 million under management, was, by all counts, in a
unique situation: His seat on the board had been earned through a hard-fought proxy contest with
management, during which he had advocated for management to close the discount between the
current share price and net asset value (NAV).
Opportunity Partners itself was a shareholder in MXE, having taken a 3% ownership position over
the course of 1999. Investing in MXE was consistent with Opportunity Partners’ approach to taking
positions in closed-end funds which traded at a discount—an approach that had helped gain the
hedge fund favorable returns throughout the 1990s.
The 55-year-old Goldstein, known for his affability and persuasiveness, sat reflectively at the
boardroom table with the four other directors of the Fund. Goldstein’s relationship with the rest of
the board was, at best, strained—an unfortunate outcropping of the proxy fight that had ended
recently. At the moment, he could feel an undercurrent of hostility in the boardroom.
Goldstein needed to articulate his position on the best approach to realize NAV for shareholders,
and for Opportunity Partners. Some board members were advocating a straight liquidation—an
approach that had previously failed to garner shareholder approval. Other options included
undertaking a large-scale self-tender offer, instituting a share repurchase program, or converting the
closed-end MXE fund to a more traditional open-end(ed) fund. Whatever he decided, Goldstein
understood that his decision would have implications not only for MXE shareholders, but also for his
reputation and future prospects as an activist investor in the closed-end fund space.
Closed-End Funds
Closed-end funds (CEFs) issued a fixed number of shares at inception, with the funds “closing” to
any new investors once the fund was established. Shares in a CEF, then, were not redeemable and
could only be traded in the secondary market.1 By contrast, open-end funds (OEFs) remained open to
inflows of new investor capital throughout the life of the fund, with investors able to redeem shares
for the NAV per share.
Once the initial capital had been raised to establish a CEF, the fund managers would purchase a
portfolio of securities with the proceeds. As with other investment portfolios, managers of CEFs
selected an investment strategy and determined the mix of asset classes on which they would focus.
________________________________________________________________________________________________________________
Professor Robin Greenwood and Research Associate James Quinn prepared this case. HBS cases are developed solely as the basis for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
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Opportunity Partners
Thus, the composition of CEFs cut across a wide range of investment categories, including municipalbond funds, stock funds, and taxable bond funds.
Though less well known than open-end funds, the first closed-end fund in the United States was
established in 1893 and predated the first open-end mutual fund by 30 years. Shares in closed-end
funds were held historically by retail investors. At the end of 1999, there were 659 closed-end funds
worldwide, with assets under management of $150 billion. The largest fund, Tri-Continental, had
assets of $3.9 billion and traded on the New York Stock Exchange.2 While shares outstanding were
more stable for CEFs than for OEFs, the occasion of rights offerings or secondary offerings of shares
could increase fund size.
Because the price of CEF shares was set by supply and demand, it could, and often would, diverge
from NAV. At the end of 1999, many funds sold at high discounts—as much as 32% for the India
Growth fund—while others sold at substantial premia—as much as 54% for the Templeton Russia
fund. (Exhibit 1 shows a list of 10 closed-end funds trading at extreme discounts and premia.) When
new closed-end funds were initially brought to market, they typically traded at a premium and then
moved to a discount over time, with the average closed-end fund trading at a discount to NAV.3
Even the average U.S. equity CEF discount tended to vary over time, with new funds tending to
appear when the average discount was small. (Exhibit 2 shows the average closed-end fund discount
during the period 1965–1999.) As closed-end funds were liquidated, prices tended to converge to
NAV as a result of arbitrage.
One rationale for the closed-end structure was to allow investment managers to hold illiquid and
hard-to-mark assets. For example, CEF managers did not have to worry about the price impact of
forced sales.4 In contrast, in an open-end fund, managers often had to worry about how to trade
when investors redeemed their shares en masse, forcing them to liquidate the fund’s investments.
Thus, the CEF manager had comparatively more flexibility to simply choose the most attractive
stocks. The opportunity for intraday trading, a trait shared by exchange traded funds, was another
characteristic of CEFs that some investors found attractive. Against these potential benefits, Goldstein
noted “a lack of economic discipline” inherent in the CEF structure: “No matter how poorly
management performs, there is no threat of redemption.”
One other distinction between closed-end and open-end funds included the possibility for closedend funds to have some leverage in their portfolios, as allowed for in the Investment Company Act of
1940. By contrast, open-end funds were not permitted leverage.
Average fees on closed-end funds, most of which were actively managed, were in line with those
of mutual funds. According to Morningstar estimates, average expense ratios for closed-end funds in
1999 were 1.29%, compared with 1.37% for mutual funds, with closed-end funds saving processing
expenses associated with investor purchases and redemptions.5
The timing of closed-end fund IPOs often coincided with hot markets. Particularly popular during
the 1990s were so-called country funds, which sought to position investors to capitalize on emerging
markets and other growth economies around the world. (Exhibit 3 shows a list of country funds as of
1998–1999.)
The Mexico Equity & Index Fund (MXE)
The Mexico Equity & Index Fund (MXE) was a closed-end fund that invested primarily in equity
and debt securities issued by Mexican companies. MXE was created in August 1990, following a
12-month period when the Bolsa Mexican stock index had increased by 90%. At the initial public
2
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Opportunity Partners
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offering, MXE listed six million shares at $12 per share.6 Shares were subsequently traded on the New
York Stock Exchange.
The MXE fund retained the services of two investment advisors. Acci Worldwide, S.A. de C.V.
served as the fund’s Mexican Adviser, and Advantage Advisers, Inc., a subsidiary of CIBC
Oppenheimer Corp., served as the fund’s U.S. co-advisor. The MXE fund held positions across a
range of industries, including cement, communications, construction, entertainment/media, and
financial groups, as well as food, beverage, and tobacco. For their services, the Mexico and U.S.
advisors received monthly fees at an annual rate of 0.52% and 0.40% of monthly assets, respectively.
In the early 1990s, the MXE share price and net asset value (NAV) increased steadily, reaching
$21.63 and $22.10 in October 1994, respectively. During that time, the MXE fund often traded at a
discount to NAV. The fund’s share price and NAV declined in the mid-1990s, during a period in
which the Mexican economy endured the crisis surrounding the devaluation of the Peso. For a period
of roughly six months after the devaluation, however, MXE traded at a premium to NAVof up to
40%. (Exhibit 4 shows Mexico Equity & Income Fund share price, NAV, and discount/premium.)
In a letter to shareholders, MXE management acknowledged a period of poor performance in the
12 months leading up to September 1999. Over the period, the fund’s NAV declined 0.66% while the
Bolsa Index rose 17.7%. Management explained that the rising Bolsa rewarded funds that were more
heavily focused on equities (MXE also held debt securities), and also pointed out that “the riskcontrol measures” the fund had instituted limited MXE’s participation in the outperformance of
Telmex, the Mexican phone company that constituted about 25% of the Bolsa Index but only 9% of
the fund.
Notwithstanding its underperformance in 1999, MXE counted itself among the leading Mexicobased closed-end funds throughout much of the 1990s. MXE was the recipient of a LatinFinance
award for top-performing Mexico equity funds, finishing first in the seven-year performance
category. (Exhibit 5 shows monthly returns of Bolsa, S&P 500, and MXE.)
As of April 30, 1999, MXE’s total net assets were $109 million, with NAV per share of $9.21 and
11.8 million shares outstanding.7 The vast majority of MXE’s net assets were invested in equities
(81.84%); the remainder was in debt securities (7.96%), short-term Mexican corporate notes (7.22%),
and cash (2.51%).8 (Exhibit 6 shows MXE’s 10 largest equity investments.)
The MXE fund was held by prominent investors City of London Investment Management (2.18
million shares held) and Harvard College (0.46 million shares held). (Exhibit 7 shows a list of
institutional holders, which in total owned roughly 25% of MXE.)
Opportunity Partners
Goldstein and partner Steven Samuels founded Opportunity Partners in 1993, working out of
their homes at the outset. Goldstein was an improbable founder of a hedge fund. Trained as an
engineer, he had spent 25 years working as an engineer for the City of New York. But he found he
had an instinct and passion for investing, and, at age 47, Samuels had offered to help him raise
money and find clients. Opportunity Partners opened with $700,000 under management and finished
its first year up 41.50%. (Exhibit 8 shows Opportunity Partners Performance 1993–2000.) In the early
years of the firm, Goldstein was investing primarily in closed-end funds, looking for funds that
traded at a discount and then “hoping that the discount narrows.”9
Following Opportunity Partners’ initial performance, Goldstein decided in 1996 that the fund
should take a new approach. He explained: “When we got more money, we realized we could
3
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Opportunity Partners
influence management, and we started to take a different route.” He added, “We went from being
passive value investors to active value investors. Instead of waiting for a catalyst, we decided we
could be the catalyst.”10
In 1999, Andrew Dakos joined forces with Goldstein, eventually leaving the family business he
had been managing to become a full-time value investor. Dakos had identified Goldstein as “an icon
in the field” and, following a series of initial meetings, had then sent him a detailed analysis of an
investment target that Opportunity Partners was considering at the time. Goldstein was impressed
with the analysis and invited Dakos to join the firm.
Goldstein identified his closed-end fund strategy as “investing for dummies,” adding: “You don’t
have to value [the assets]—they publish NAV so we know what it’s worth. If NAV is 12, and the
stock is 10—well, 12 is more than 10 . . . I don’t think you need an MBA for that.” Dakos reasoned, “If
a fund is trading at a 20% discount, it’s hard to argue with the logic of liquidating the fund and
taking the money and putting it in something else that’s got a 20% discount . . . if you kept doing
that, you’d do pretty well.” But identifying potential investment targets was more complicated than
simply choosing funds trading at the largest discount to NAV. This was because activism often
required the support of other shareholders. Therfore, Goldstein believed that “the first thing you
have to do as an activist is to form a good network. You have to be able to call up institutional
investors and ask, ‘What would you think about this?’”
Goldstein believed that the primary reason most managers elected to bring out a closed-end fund
was “to provide a steady stream of funds to management.” As a result, he explained, “you can see
why [management] is going to fight like hell to keep [the assets].”
As an activist investor, Goldstein attempted to influence management and other investors in the
fund. Although the specific tactics varied from investment to investment, the typical approach was to
take a position in a fund that was trading at a discount, and subsequently meet with management to
persuade them to take steps to close it. Goldstein and his team approached these initial overtures
toward management in a spirit of civility. Nonetheless, they recognized that these negotiations often
placed management in a difficult position. Dakos explained: “With an operating company, there are
more things that can be done [with management] that are win-win . . . with closed-end funds, what
you do to eliminate the discount is going to result in a lower asset base, which is going to result in
lower fees . . . it’s more of a zero-sum game.”
As a general rule, Opportunity Partners did not fully hedge their CEF positions. “Our theory is
that over the long term, markets go up,” Goldstein explained. Instead, the fund held a diversified
basket of CEFs, taking on some “NAV risk.” At times, this risk worked against performance: “If
NAVs are dropping by 50%, it’s going to hurt even if you can close the discount,” he said. In some
rare cases, and especially crises, the NAV would drop at the same time that the discount would
widen. Goldstein described these events to be “like poison. In the short run, that can affect your
performance . . . but if you have a longer-term horizon, it’s not much of a big deal.” For Opportunity
Partners, this occurred in 1998, with returns down more than 20% in the third quarter. Goldstein and
Dakos attributed the performance to the Russian debt crisis, saying, “all the emerging markets got
killed, and we were too heavily in emerging markets and unhedged.” While Opportunity Partners
recovered from the short-term loss to post positive returns for the year, Goldstein described it as a
lesson to not allow the fund too much leverage, or to be excessively overweight in one area.
4
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Opportunity Partners
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Opportunity Partners Invests in MXE
In December 1998, Opportunity Partners purchased its first shares of the MXE fund, with
Goldstein purchasing 90,000 shares on behalf of his clients. Throughout the first half of 1999,
Goldstein increased Opportunity Partners’ stake in MXE, acquiring a total of 277,044 shares,
approximately 3% of the fund’s common stock. (Exhibit 9 shows other large positions held by
Opportunity Partners.)
Following initial conversations with MXE management, Goldstein and his team initiated a proxy
contest, submitting a letter in November 1999 to MXE shareholders in which Goldstein posed the
question, “Would you like to eliminate the persistent discount from net asset value (“NAV”) at which
our Fund’s shares trade?” He continued, “I would, and that is why I intend to seek election as
director of the Fund at the 1999 Annual Meeting of Shareholders.” (Excerpts of the letter to
shareholders are shown in Exhibit 10.)
With the annual meeting scheduled for December 1999 in New York, shareholders had six weeks
to complete the proxy cards and thus decide whether or not Goldstein would gain a position on the
board. As the contest got underway, Goldstein felt increasing anxiety about the outcome. The leading
shareholder, New York investment firm Mira, L.P., which had purchased much of its roughly 20%
stake in MXE from City of London Investment Management, initially neglected to return its
proxy card.
For its part, MXE management opposed Goldstein’s election to the board, preparing its own series
of letters to shareholders and working with the senior executive team to craft its best strategy to
manage the direction of the Fund in the midst of an activist proxy contest. MXE management urged
shareholders to put its trust in the self-tender offers and share repurchase programs already
underway and warned against Goldstein’s “coercive measures.” MXE management stated publicly:
Your Board of Directors considers that Mr. Goldstein’s proposals are, in fact, coercive
measures that are ultimately intended to force the Board to take one or more of three possible
actions: convert the Fund into an open-end fund; conduct a large scale tender offer for all of its
shares; or liquidate the Fund. In the Board’s view, any of these alternatives would be
fundamentally inconsistent with the best interest of shareholders of the Fund. Each of the
alternatives would disrupt the Fund’s investment process, which to date has had long term
success; would impose costs and burdens on all stockholders who wish to remain in the Fund
and possibly on all shareholders; and ultimately would be likely to necessitate liquidation of
the Fund.11
Goldstein countered: “I think it is time to stop stalling and simply eliminate the discount . . . I am
convinced that this board will not adopt the aggressive measures necessary to guarantee NAV unless
further pressure is applied.”12
Goldstein Elected to the Board
When shareholders convened at the annual meeting in February 2000, Goldstein was
overwhelmingly elected to the board, receiving the required majority of outstanding shares,
including the support of Mira, L.P., the other large shareholder.13 Goldstein suggested that his early
reception with the other board members was professional, but standoffish. “You have to be on the
same page [with other board members] for it to work. In this case, I felt like a skunk at a garden
party.”
5
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Opportunity Partners
One of the first steps Goldstein took upon being elected to the board was to request
reimbursement for the costs that Opportunity Partners incurred during the proxy fight, about
$30,000, a figure considered low by industry standards. Initially the board, which itself had spent an
estimated $200,000 on the proxy fight, refused, but Goldstein persuaded them to reimburse the fees
given that his election demonstrated that his expenses were in the best interest of shareholders.
The board spent much of the spring discussing alternatives for eliminating the discount, given the
mandate from shareholders. On April 5, 2000, the board announced its plan for full liquidation of the
fund, contingent on shareholder approval. At the time, Goldstein supported the liquidation
approach. (Exhibit 11 shows the Board’s rationale for liquidation vis-à-vis the four alternatives.)
When the shareholders cast their votes on the matter at a special meeting on September 12, however,
the liquidation proposal failed to receive the two-thirds supermajority needed in this instance,
receiving 57% of outstanding shares in favor of liquidation.14 Goldstein attributed part of the failed
vote to “shareholder apathy.”15
The Decision
On September 15, 2000, just three days after the proposed liquidation had failed to receive
sufficient shareholder votes, the board, which included Goldstein and three other directors, met to
discuss their next steps. (Exhibit 12 shows the full timeline of Opportunity Partners’ involvement
with MXE.) The Fund’s NAV had increased 33% in the 12-month period ending July 31, 2000, and the
common share market price had increased 53%. These results compared favorably to the Bolsa Index,
which gained 24.5% during the same period. At the time, MXE was trading at a 10% discount, and
investors were generally optimistic about Mexico’s future, with a new president scheduled to take
office in December following what was perceived as a democratically open and fair election. The
fund was managed by Maria Eugenia Pichardo, a woman whose investment management talent
Goldstein held in high regard.
One concrete proposal emerged during the course of the board meeting: The board could hold
another liquidation vote at the upcoming annual meeting scheduled for March, 2001. Alongside this
proposal, some board members were advocating a partial self-tender offer of 20% of the fund’s
common stock (approximately 1.99 million shares) at a price equal to 92% of net asset value.
Goldstein considered the options. He felt that something needed to be done quickly to deliver
NAV to shareholders, and he certainly did not want to be perceived as “sitting around collecting
fees.” Goldstein held only one of five board votes, and it was conceivable that his would prove a
dissenting view. Nonetheless, if he took a position counter to the rest of the board and if shareholders
ultimately supported his view via shareholder vote, he could find himself in a stronger position vis-àvis the rest of the board. The available options included
•
Full liquidation
•
Partial liquidation via increased dividend payout
•
A large-scale self-tender offer
•
A large-scale repurchase program
•
Converting the fund to open-end (or merging it with an existing open end fund)
As a director of a fund whose seat was gained through activism, Goldstein’s public position
would be scrutinized by current shareholders and investors alike, including his own Opportunity
6
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Opportunity Partners
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Partners investors who collectively held a 3% stake in MXE. Goldstein felt it had taken longer than
expected to fully “unlock” value for shareholders that would occur by eliminating the discount,
having earned his seat on the board more than six months earlier. Nonetheless, he was eager to
support an approach that was at once feasible and in the best interests of all shareholders. Two of the
options—full liquidation and open-ending the fund—would require the approval of shareholders via
a shareholder vote, including attendant mailing and special meeting costs. For Goldstein, the
proposition of how best to realize NAV was complicated by his awareness that shareholders were “a
diverse group,” with a sizable minority interested in continuing in the fund rather than liquidating
it outright.
7
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Pacific/Asia
ex-Japan Stock
Pacific/Asia
ex-Japan Stock
Latin America
Stock
Pacific/Asia
ex-Japan Stock
Pacific/Asia
ex-Japan Stock
Pacific/Asia
ex-Japan Stock
Pacific/Asia
ex-Japan Stock
Europe Stock
Jardine Fleming
India
Korea Equity
Mexico Fund
Indonesia Fund
Malaysia Fund
Thai Capital
Thai Fund
Templeton
Russia
Templeton Asset
Management
Morgan Stanley
Dean Witter
Investment Ma
Mutual Fund
Company
Morgan Stanley
Dean Witter
Investment Ma
Credit Suisse
Asset
ManagementAmericas
Impulsora del
Fondo Mexico
Nomura
Investment
Management
Jardine Fleming
International
Unit Trust of India
Investment
Equus Capital
Management
Advisor
19.94
7.81
4.88
7.06
5.44
17.38
4.88
11.88
15.25
10.31
Price /Share
12.92
5.71
3.61
5.31
4.48
24.44
6.88
17.03
22.26
15.56
NAVa
aSome of these funds invested in private companies, rendering the NAV more difficult to compute.
Morningstar Principia database, accessed November 2007.
Pacific/Asia
ex-Japan Stock
India Growth
Source:
Domestic Hybrid
Equus II
Morningstar
Category
-54.3
-36.8
-35.0
-33.0
-21.4
28.9
29.1
30.3
31.5
33.7
Discount
(Premium)
Five CEFs Trading at Largest Discount, Five Funds Trading at Largest Premium
Fund Name
Exhibit 1
06/30/1999
06/30/1999
12/31/1998
06/30/1999
12/31/1998
12/31/1998
n/a
09/30/1998
12/31/1998
06/30/1998
NAV Date
53.6
72.3
22.9
49.6
16.6
992.9
42.3
103.5
134.6
110
Net Assets
$MM
1995–06
1988–02
1990–05
1987–05
1990–03
1981–06
1993–12
1994–03
1988–08
1992–09
Inception
Date
NYSE
NYSE
NYSE/OSE
NYSE
NYSE
NYSE
NYSE/OSE
NYSE
NYSE
AMEX
Exchange
208-097
-8-
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Opportunity Partners
Exhibit 2
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Average Closed-End Fund Discount, 1965–1999
30.00%
20.00%
15.00%
10.00%
5.00%
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
-5.00%
1967
0.00%
1965
Discount (Premium)
25.00%
-10.00%
-15.00%
Sources:
Data on closed-end fund discount from Lakonishok, Shleifer, Vishny (1991) for 1965 to 1985 (general equity funds
only); CDA/Wiesenberger for 1986 to 1998 (general equity funds only); and Bloomberg and CRSP for 1999
onward (general equity funds only).
9
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Pacific/Asia
ex-Japan Stock
Pacific/Asia
ex-Japan Stock
Latin America
Stock
Pacific/Asia
ex-Japan Stock
Pacific/Asia
ex-Japan Stock
Latin America
Stock
Europe Stock
Japan Stock
Pacific/Asia
ex-Japan Stock
Latin America
Stock
Europe Stock
Jardine
Fleming India
Mexico Fund
Jardine
Fleming
China Region
Fidelity
Advisor
Korea
Brazil Fund
Swiss
Helvetia
Japan OTC
Equity
First Australia
Mexico
Equity &
Income
Italy Fund
Morningstar
Category
SSBC Fund
Management
Acci Worldwide
EquitiLink
International
Management
Nomura Asset
Management
Hottinger
Capital
Scudder
Kemper
Investments
Fidelity Mgnt &
Research
Jardine
Fleming
International
Mgmt
Impulsora del
Fondo Mexico
Jardine
Fleming
International
Mgmt
Unit Trust of
India
Investment
Family
17
8.94
7.63
11.81
13.81
18.5
11.5
8.44
17.38
11.88
15.25
Price/
Share
20.29
10.97
9.5
14.87
17.52
23.86
16.04
11.78
24.44
17.03
22.26
NAV
List of Select Country Funds, Sorted by Discount to NAV
India Growth
Fund Name
Exhibit 3
15.81%
16.21%
18.51%
19.68%
20.58%
21.18%
28.30%
28.35%
28.89%
30.24%
31.49%
Discount
09/30/1999
06/30/1999
01/31/1999
07/31/1999
06/30/1999
06/30/1999
09/30/1998
06/30/1999
12/31/1998
09/30/1998
12/31/1998
NAV Date
39.77%
10.79%
0.23%
114.99%
-6.93%
3.47%
-53.78%
37.24%
-43.54%
-38.06%
-16.23%
1998 Returns
149.6
129.4
161.7
92.5
427.5
278.9
51.8
62
992.9
103.5
134.6
Net Assets
$MM
1986–02
1990–08
1985–12
1990–03
1987–08
1988–04
1994–10
1992–07
1981–06
1994–03
1998–08
Inception
Date
NYSE
NYSE
AMEX
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
NYSE
Exchange
208-097
-10-
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Japan Stock
Japan Equity
Daiwa
International
Cap Mgmt
(Singapore)
Credit Suisse
Asset
ManagementAmericas
9.69
13.06
15.31
11.33
15.46
18.15
16.63
Each country fund listed had a minimum of 95% of its holdings in a single country.
Europe Stock
Portugal
Fund
Indocam
International
Investment
Service
14
NAV
Note:
Europe Stock
France
Growth
Alliance Capital
Management
Price/
Share
Morningstar Principia database, accessed November 2007.
Europe Stock
Spain Fund
Family
Source:
Morningstar
Category
Fund Name
14.38%
14.47%
15.52%
15.65%
Discount
10/31/1998
12/31/1998
12/31/1998
12/31/1998
NAV Date
-6.78%
33.12%
49.59%
53.47%
1998 Returns
78.3
83.3
238.8
139.1
Net Assets
$MM
1992–08
1989–11
1990–05
1988–06
Inception
Date
NYSE
NYSE
NYSE
NYSE/OSE
Exchange
208-097
-11-
For the exclusive use of r. qasmi, 2022.
This document is authorized for use only by rafif qasmi in Behavioral Finance – 2022 taught by Stuart Webb, University of Minnesota from Feb 2022 to Aug 2022.
For the exclusive use of r. qasmi, 2022.
208-097
Opportunity Partners
Exhibit 4
MXE Stock Price, NAV, and Discount Premium: 1990–2000.
$30.00
NAV
$25.00
Value ($)
$20.00
$15.00
$10.00
Share Price
$5.00
Aug-00
Feb-00
Feb-99
Aug-99
Aug-94
Aug-94
Aug-98
Feb-94
Feb-94
Feb-98
Aug-93
Aug-93
Aug-97
Feb-93
Feb-93
Feb-97
Aug-92
Aug-92
Aug-96
Feb-92
Feb-92
Feb-96
Aug-91
Aug-91
Aug-95
Feb-91
Feb-91
Feb-95
Aug-90
Aug-90
$0.00
40.0%
20.0%
10.0%
Aug-00
Feb-00
Aug-99
Feb-99
Aug-98
Feb-98
Aug-97
Feb-97
Aug-96
-20.0%
Feb-96
-10.0%
Aug-95
0.0%
Feb-95
Discount (Premium)
30.0%
-30.0%
-40.0%
-50.0%
Source:
Created by casewriter using data from www.etfconnect.com, accessed October 2007.
12
This document is authorized for use only by rafif qasmi in Behavioral Finance – 2022 taught by Stuart Webb, University of Minnesota from Feb 2022 to Aug 2022.
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Opportunity Partners
Exhibit 5
Date
01/31/1995
02/28/1995
03/31/1995
04/28/1995
05/31/1995
06/30/1995
07/31/1995
08/31/1995
09/29/1995
10/31/1995
11/30/1995
12/29/1995
01/31/1996
02/29/1996
03/29/1996
04/30/1996
05/31/1996
06/28/1996
07/31/1996
08/30/1996
09/30/1996
10/31/1996
11/29/1996
12/31/1996
01/31/1997
02/28/1997
03/31/1997
04/30/1997
05/30/1997
06/30/1997
07/31/1997
08/29/1997
09/30/1997
10/31/1997
11/28/1997
12/31/1997
01/30/1998
02/27/1998
03/31/1998
04/30/1998
05/29/1998
06/30/1998
07/31/1998
08/31/1998
09/30/1998
10/30/1998
11/30/1998
12/31/1998
208-097
Monthly Returns of Bolsa, S&P 500, and MXE, 1995–2000
Bolsa
Returns
(Pesos)
Exchange
Rate (Peso to
USD)
S&P 500
Return Index
MXE Stock
Price (USD)
MXE NAV
(USD)
MXE
Returns
-11.9%
-26.0%
18.3%
7.0%
-0.8%
12.9%
8.2%
6.0%
-5.0%
-3.8%
16.8%
3.3%
9.2%
-6.7%
8.5%
3.7%
0.6%
0.2%
-6.3%
9.9%
-2.1%
-0.7%
2.4%
2.1%
8.5%
5.3%
-2.4%
0.2%
5.6%
12.3%
13.7%
-8.3%
14.5%
-12.7%
7.0%
5.1%
-12.6%
4.7%
4.8%
1.6%
-11.2%
-5.4%
-0.9%
-29.5%
19.3%
14.1%
-7.5%
5.0%
5.75
5.98
6.77
5.92
6.19
6.25
6.11
6.26
6.39
7.07
7.53
7.69
7.36
7.60
7.52
7.41
7.44
7.59
7.58
7.58
7.54
7.97
7.89
7.89
7.82
7.92
7.91
7.95
7.92
7.93
7.82
7.82
7.77
8.39
8.22
8.07
8.45
8.51
8.52
8.48
8.83
8.96
8.92
10.06
10.25
10.03
10.00
9.90
2.6%
3.9%
3.0%
2.9%
4.0%
2.3%
3.3%
0.3%
4.2%
-0.4%
4.4%
1.9%
3.4%
0.9%
1.0%
1.5%
2.6%
0.4%
-4.4%
2.1%
5.6%
2.8%
7.6%
-2.0%
6.2%
0.8%
-4.1%
6.0%
6.1%
4.5%
8.0%
-5.6%
5.5%
-3.3%
4.6%
1.7%
1.1%
7.2%
5.1%
1.0%
-1.7%
4.1%
-1.1%
-14.5%
6.4%
8.1%
6.1%
5.8%
13.75
10.00
11.38
13.00
11.25
11.25
11.25
10.63
10.25
9.25
10.25
8.75
10.13
9.13
9.63
10.00
10.13
9.88
9.63
10.63
10.50
9.50
10.25
9.50
10.25
10.50
10.63
10.25
10.75
12.13
14.13
12.38
14.44
12.50
13.25
10.69
9.75
9.88
9.88
9.69
8.44
8.13
7.75
4.94
5.13
6.25
5.81
5.19
10.10
8.94
8.15
9.78
9.93
10.57
11.36
10.71
10.88
9.42
10.02
10.19
11.23
10.93
11.19
11.89
12.54
12.19
11.96
12.83
12.84
12.06
12.65
11.66
12.41
13.17
12.85
12.90
13.50
15.01
16.83
16.09
18.17
15.38
16.38
13.79
11.88
11.83
12.15
12.45
11.00
10.20
10.16
6.90
7.20
7.80
7.70
7.00
-10.6%
-27.3%
11.2%
13.5%
-10.9%
0.0%
5.4%
-5.6%
-1.2%
-11.9%
10.8%
-15.1%
18.8%
-11.0%
5.5%
3.9%
1.2%
-1.2%
-3.8%
10.4%
-1.2%
-9.5%
7.9%
-2.9%
7.9%
2.4%
1.2%
-3.5%
4.9%
12.8%
16.5%
-12.4%
16.7%
-13.4%
6.0%
-19.3%
-8.8%
1.3%
0.0%
-1.9%
-12.9%
-3.7%
-4.6%
-36.3%
3.8%
21.9%
-7.0%
4.5%
13
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208-097
Opportunity Partners
Date
01/29/1999
02/26/1999
03/31/1999
04/30/1999
05/31/1999
06/30/1999
07/30/1999
08/31/1999
09/30/1999
10/29/1999
11/30/1999
12/31/1999
01/31/2000
02/29/2000
03/31/2000
04/28/2000
05/31/2000
06/30/2000
07/31/2000
08/31/2000
Bolsa
Returns
(Pesos)
Exchange
Rate (Peso to
USD)
S&P 500
Return Index
MXE Stock
Price (USD)
MXE NAV
(USD)
MXE
Returns
0.0%
7.7%
15.7%
9.8%
1.2%
6.4%
-9.8%
-3.3%
-0.7%
7.9%
12.6%
16.2%
-7.6%
11.9%
1.4%
-11.1%
-10.2%
16.6%
-6.2%
2.3%
10.16
9.88
9.51
9.29
9.70
9.36
9.40
9.35
9.37
9.60
9.44
9.46
9.58
9.36
9.26
9.39
9.50
9.79
9.32
9.20
4.2%
-3.1%
4.0%
3.9%
-2.4%
5.5%
-3.1%
-0.5%
-2.7%
6.3%
2.0%
5.9%
-5.0%
-1.9%
9.8%
-3.0%
-2.1%
2.5%
-1.6%
6.2%
5.25
5.56
7.00
7.69
7.00
7.69
7.06
6.88
6.75
6.88
8.06
8.94
8.44
10.50
11.38
9.69
9.19
10.50
10.69
10.75
6.57
7.14
8.43
9.21
8.78
9.64
8.66
8.40
8.38
8.33
9.52
10.99
10.07
12.10
12.52
10.82
10.19
11.51
11.36
11.90
1.2%
6.0%
25.8%
9.8%
-8.9%
9.8%
-8.1%
-2.7%
-1.8%
1.9%
17.3%
12.4%
-5.6%
24.4%
8.3%
-14.8%
-5.2%
14.3%
1.8%
0.6%
Sources:
Data on Bolsa returns, S&P 500, and MXE returns from Thomson Datastream. Exchange rate data from Global
Financial Data. MXE share price and NAV data from ETF Connect Web site, www.etfconnect.com, accessed
October 2007.
Note:
In some instances, the retrieval date for the MXE share price and NAV varies from the listed date by one or two
days.
14
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Opportunity Partners
Exhibit 6
208-097
MXE Fund’s 10 Largest Equity Investments, as of April 30, 1999
% of
Net Assets
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Grupo Financiero Bancomer, S.A. de C.V. O—Financial Groups
Telefonos de Mexico, S.A. de C.V. A1—Communications
Grupo Carso, S.A. de C.V. A1—Industrial Conglomerates
Grupo Televisa S.A.—Communications
Cifra, S.A. de C.V.—Retailing
Fomento Economico Mexicano, S.A. de C.V.—Food, Beverage & Tobacco
Grupo Modelo, S.A. de C.V. C—Food, Beverage & Tobacco
Grupo Sanborns, S.A. de C.V. B1—Specialty Stores
Grupo Carso Global Telecom A1—Communications
Grupo Isma, S.A. de C.V. UBC—Industrial Conglomerates
Source:
7.8%
7.5%
7.0%
5.4%
4.2%
3.8%
3.8%
3.6%
3.2%
3.1%
Dow Jones Newswires, “Mexico Equity & Income 3Q Institutional Equity Holders,” accessed January 27, 1999.
Exhibit 7
Mexico Equity & Income—Institutional Equity Holders
Number of
Shares Held
Change
Shares Held
City of London Investment Management
Harvard College
Newgate LLP
Summit Capital Management LLC
York Management & Research
CIBC Oppenheimer Corp.
Travelers Inc.
Keycorp
Moore Capital Management, Inc.
Strome Susskind & Co.
Advest Group, Inc.
Legg Mason Wood Walker
Bartlett & Co.
Bank of New York
Cullen/Frost Banker, Inc.
United States Trust/NY
Bear Stearns & Co.
Dresdner RCM Global Investment
Zweig Advisors, Inc.
2,183,053
462,790
117,921
44,400
33,400
27,332
27,302
17,742
12,750
10,400
3,500
1,844
1,777
1,000
850
675
90
0
0
116,524
175,000
(9,130)
(77,700)
(45,200)
(588)
1,670
800
0
(11,200)
3,500
1,844
(2,000)
0
0
0
(4,000)
(7,300)
(41,100)
TOTAL
2,946,826
101,220
Source:
Technimetrics Inc., report dated September 30, 1998, in “Mexico Equity & Income 3Q institutional
Investors,” Dow Jones Newswires, January 27, 1999, via Factiva, accessed November 2007.
Note:
MXE had 11,825,273 common shares outstanding as of July 31, 1998.
15
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208-097
Opportunity Partners
Exhibit 8
Opportunity Partners Performance versus S&P 500, 1993–2000
Opportunity
Partners
Quarterly Returns
1993 Q1
1993 Q2
1993 Q3
1993 Q4
4.48%
2.61%
15.54%
14.21%
1994 Q1
1994 Q2
1994 Q3
1994 Q4
4.83%
5.92%
4.78%
-3.00%
1995 Q1
1995 Q2
1995 Q3
1995 Q4
3.44%
5.51%
6.83%
5.92%
1996 Q1
1996 Q2
1996 Q3
1996 Q4
4.61%
3.84%
1.32%
5.57%
1997 Q1
1997 Q2
1997 Q3
1997 Q4
5.30%
11.00%
5.84%
-4.60%
1998 Q1
1998 Q2
1998 Q3
1998 Q4
12.78%
-4.46%
-21.10%
19.05%
1999 Q1
1999 Q2
1999 Q3
1999 Q4
4.31%
9.89%
1.81%
12.17%
2000 Q1
2000 Q2
2000 Q3
9.89%
1.69%
0.18%
Source:
Opportunity
Partners
YTD Returns
S&P 500
Quarterly Returns
S&P 500
YTD Returns
41.50%
4.37%
0.49%
2.58%
2.32%
10.08%
12.90%
-3.79%
0.42%
4.89%
-0.02%
1.32%
23.50%
9.74%
9.55%
7.95%
6.02%
37.58%
16.10%
5.37%
4.49%
3.09%
8.34%
22.96%
18.00%
2.68%
17.46%
7.49%
2.87%
33.36%
1.21%
13.95%
3.30%
-9.95%
21.30%
28.58%
30.91%
4.98%
7.05%
-6.24%
14.88%
28.58%
2.29%
-2.66%
-0.97%
Thomson Datastream and company materials.
16
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Opportunity Partners
Exhibit 9
208-097
Other Large Positions Held by Opportunity Partners, as of September 30, 2000
Long Position
Symbol
Shares
Value (USD)
Blackrock North American Government Income Trust
BNA
355,300
3,566,924
Emerging Markets Infrastructure Fund
EMG
301,181
2,953,979
Dreyfus Strategic Government Income Fund
DSI
236,000
2,175,843
Worldwide Dollarvest Fund
WDV
375,600
2,096,642
Strategic Global Income Fund
SGL
148,642
1,651,399
Ellsworth Convertible Growth and Income Fund
ECF
179,950
1,628,622
Captec Net Lease Realty
CRRR
182,798
1,592,580
Lincoln National Convertible Securities Fund
LNV
111,475
1,542,877
H&Q Healthcare Investors
HQH
89,587
1,509,261
Dresdner RCN Global Strategic Income Fund
DSF
242,850
1,458,160
Swiss Helvetia Fund
SWZ
104,198
1,339,501
The Italy Fund
ITA
83,529
1,180,220
France Growth Fund
FRF
87,418
1,112,542
Pakistan Investment Fund
PKF
436,769
1,107,702
Brantley Capital Corp.
BBDC
111,800
877,614
Source:
Company materials.
17
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For the exclusive use of r. qasmi, 2022.
208-097
Opportunity Partners
Exhibit 10
Excerpts of Letter to Shareholders
Phillip Goldstein
60 Heritage Drive
Pleasantville, NY 10570
October 21, 1999
Dear Fellow Shareholder of The Mexico Equity and Income Fund:
As of October 1, 1999, our Fund’s shares were trading at a discount of almost 20%. Would you like
to eliminate the persistent discount from net asset value (“NAV”) at which our Fund’s shares trade? I
would and that is why I intend to seek election as a director of the Fund at the 1999 Annual Meeting
of Shareholders. I also intend to introduce four proposals at the Meeting.
[The Four Proposals are excerpted below.]
1. Within 30 days of approval of this proposa1, the Fund’s Mexican and U.S. investment adviser
shall present to the Board of Directors a proposal designed to afford shareholders an opportunity to
promptly realize NAV for all their shares.
2. If the Advisers fail to present to the Board of Directors a plan designed to afford shareholders
an opportunity to promptly realize NAV for all their shares, the Fund’s investment advisory
agreements with the Advisers shall be terminated as soon as permissible.
3. The following bylaw shall be adopted: “All compensation earned by the directors shall be held
in escrow and not paid to them until the shareholders are able to realize NAV for all their shares. This
bylaw may only be altered or repealed by the stockholders.”
4. The following bylaw shall be adopted: “The expenses incurred by the Fund related to any
contested meeting of stockholders shall be limited to those legally required to achieve a quorum and
to allow shareholders to cast an informed vote on all matters to be presented at such meeting. This
bylaw may only be altered or repealed by the stockholders.”
Sincerely yours,
Phillip Goldstein
Source:
Mexico Equity & Income Fund, preliminary proxy statement, October 21, 1999.
18
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Opportunity Partners
Exhibit 11
208-097
Board Rationale for Liquidation
Of the four alternatives, the Board of Directors determined that liquidation best affords all
stockholders the opportunity to promptly realize NAV for their shares through an efficient and fair
process. The Board of Directors concluded that a large scale tender offer or share repurchase
program, by disposing of the Fund’s portfolio in a piecemeal fashion, could favor the interests of
some stockholders at the expense of others, and would not afford all stockholders the opportunity to
promptly realize NAV for all their shares. Moreover, such a program could result in higher long term
costs for the Fund, and therefore, could unfairly burden those stockholders who choose to maintain
their holdings in the Fund.
The Board of Directors concluded that converting the Fund to an open-end fund was not a
practical option for two reasons. First, the Fund would likely receive significant redemption requests
upon converting to an open-end fund which could cause the Fund to become too small to be
considered economically viable. Second, open-ending would likely result in a substantially higher
expense ratio which would unfairly burden the Fund’s remaining stockholders.
The Board of Directors determined that merging the Fund with an open-end fund is not a viable
option at this point in time because of a lack of interest on the part of suitable merger candidates in
merging with the Fund.
Based upon the foregoing considerations and other relevant factors, on April 4, 2000, the Board of
Directors determined that, under the circumstances, liquidation of the Fund is advisable as the most
effective way to afford the stockholders the opportunity to promptly realize NAV for their shares.
The Board of Directors then approved and authorized the orderly liquidation of the Fund, and by
unanimous written consent dated as of May 9, 2000, the Board of Directors, including all of the
Directors who are not “interested persons” of the Fund (as that term is defined in the Investment
Company Act of 1940, as amended (the “1940 Act”)) adopted the Plan and directed that the Plan be
submitted for consideration by the Fund’s stockholders.
Source:
Definitive Proxy Statement for special meeting, June 7, 2000.
19
This document is authorized for use only by rafif qasmi in Behavioral Finance – 2022 taught by Stuart Webb, University of Minnesota from Feb 2022 to Aug 2022.
For the exclusive use of r. qasmi, 2022.
208-097
Opportunity Partners
Exhibit 12
MXE Timeline
September
March 11
MXE announced its
plan to tender up to
10% of each
shareholder’s shares
at 90% of NAV
1998
October 21
In letters to shareholders,
Goldstein seeks board
position and runs on
platform of realizing NAV
1999
12th—Liquidation proposal
failed in shareholder vote
15th—The MXE board meets
to vote on the next course
of action
2000
February 4
Goldstein elected to
the Board of Directors
December 23
Opportunity Partners
purchased 90,000
shares of MXE
September 30
MXE had purchased
240,800 shares in
open market as part of
repurchase program
April 5
MXE Board announced
its plan to liquidate the
Fund
May
1st—MXE began its ongoing
repurchase program for 25%
(up to 2,800,000) shares of the
Fund’s common stock
14th—Self-tender offer expires,
w ith MXE having acquired
463,179 of its outstanding
shares
31st —Opportunity Partners’
2.5% stake in MXE, 277,044
shares, valued at $1.9 million
Source:
Prepared by casewriter.
20
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For the exclusive use of r. qasmi, 2022.
Opportunity Partners
208-097
Endnotes
1 Lee, C. M., Shleifer, A., and Thaler, R. (1991). “Investor sentiment and the closed-end fund puzzle.” Journal
of Finance, 46: 75–110.
2
Morningstar Principia database, closed-end fund data, accessed November 2007.
3
Discount levels varied across funds and across time.
4
Lee, C. M., Shleifer, A., and Thaler, R. (1991). “Investor sentiment and the closed-end fund puzzle.” Journal
of Finance, 46: 75–110.
5
Morningstar Principia database, closed-end fund data, accessed November 2007.
6
Thomson ONE Banker database, accessed November 2007.
7
Shares outstanding had increased primarily due to a series of rights offerings.
8 Note: Other assets in excess of liabilities totaled 0.47%. Cite “The Mexico Equity and Income Fund
Announces Earnings for The Nine Months Ended April 30, 1999.
9
Caroline Valetkevitch, “Investor Profile: Goldstein’s Bulldog Bares its Teeth,” Reuters, via Factiva, accessed
November 2007.
10
Ibid.
11
Mexico Equity & Income Fund, Preliminary Proxy Statement, October 20, 1999.
12
Mexico Equity & Income Fund, Definitive Proxy Statement, Contested Solicitations, November 4, 1999.
13
The shareholder meeting was rescheduled three times because an insufficient quorum was in attendance.
14 Vote summary: 10,060,394 common shares outstanding. 5,764,991 (57.3%) in favor; 446,014 (4.4%) opposed;
77,051 (0.77%) abstained; 3,772,340 (37.5%) did not vote at all.
15 The vote at the September 12 meeting constituted the third vote on the topic. Votes held on July 14 and
August 11 had also failed to receive enough votes.
21
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Purchase answer to see full
attachment