Art Lipson couldn’t have picked two more distinct ways to shake up the bond market.
Back in 1973, Lipson first made a name for himself by creating the bond index that grew into the Lehman Brothers Family of Indices. Now the Bloomberg Barclays Indices, they’re the benchmarks for many of the world’s largest fixed-income mutual funds. Among the funds that track them are those of Vanguard Group, the pioneer of low-cost indexing as an alternative to higher-fee active strategies.
These days, Lipson also targets fund management costs—and entrenched managers—from his perch at Western Investment, the Salt Lake City-based hedge fund he founded in 1997. As an activist investor, he’s crusaded against certain closed-end funds that he thinks ignore shareholders’ interests in favor of raking in fees. “They violate their fiduciary responsibility to shareholders on a continuing basis,” says Lipson, 73. “I realized I could get these fund companies to respond quickly if I challenge them and keep their feet to the fire, showing they could get voted out if shareholders are unhappy.”
Closed-end funds, according to Lipson, are an “obscure little backwater” of the global financial markets. There were 563 closed-end funds in the U.S., overseeing a total of $251 billion in assets, as of Nov. 10, according to data compiled by Bloomberg. The funds raise money by selling a fixed number of shares in a public offering and then use the proceeds to invest in bonds, stocks, or other assets. Since closed-end funds trade like stocks, their share prices can diverge from the per-share value of their assets.
When investor demand wanes, a fund’s shares can trade at a significant discount to net asset value. In theory, an investor could swoop in when that happens, buy up all of the fund’s shares, liquidate its assets, and collect the difference as profit.
Managers running closed-end funds that trade at steep discounts can use the opportunity to buy back some shares on the cheap. Selling some assets and buying back stock at a 15 percent discount, for example, could increase the net asset value of the remaining shares by a proportional amount. Doing that, in turn, could help bring the share price more in line with NAV.
Sometimes, though, fund companies try to avoid such remedies because they curb adviser fees. And that’s where Lipson’s strategy—which he will only say has netted double-digit average annual returns over the past two decades—comes into play.
Since 2004, when he started his activism, he’s fought with closed-end funds about 40 times, prodding them to repurchase shares or liquidate themselves or turn open-ended so investors can exit at a better price.
In his latest tussle, Lipson in August nominated himself and three other dissident directors to replace four members of the boards of two Deutsche Bank funds: Deutsche Multi-Market Income Trust and Deutsche Strategic Income Trust. He’s also seeking shareholder support to elect all directors annually, instead of in the funds’ existing staggered votes for three-year terms. “I tell all these companies I’m not going to do activism unless I can buy shares at a double-digit discount,” Lipson says. “And they know that. But they’re just so penny foolish. They let them go to big discounts, and they sit there in their fancy boardrooms rather than doing the right thing for shareholders.”
Oksana Poltavets, a spokeswoman for Deutsche Bank in New York, declined to comment. Lipson has some company in closed-end fund activism. Saba Capital Management, which has plowed more than $800 million into closed-end funds in recent years, earlier this year battled with Deutsche High Income Trust. Bulldog Investors is another activist in the space.