The day after the publication of our article on Seeking Alpha about the AllianceBernstein Income Fund (ACG), ACG experienced its largest percentage gain in the past three years. We received over thirty comments and other important feedback. Unfortunately, the fund's management and directors have not publicly responded in any way. The article discussed a provision in the prospectus that allows the shareholders to request a vote to convert the fund from closed end status to open end status. Given that the fund continues to trade at a large discount to its net asset value, it is a virtual certainty that shareholders can request a vote to open end the fund. On December 20th, ACG's largest shareholder Karpus Investment Management filed a 13D which contained a copy of a letter from Karpus to AllianceBernstein that requests exactly that.
ACG has issued over 25 press releases and numerous S.E.C. filing in 2013. The press releases include mundane monthly details about the fund's holding (Portfolio Update Press Release), which rarely change, and dial-in numbers for conference calls. The last conference call addressed obvious macro factors such as low interest rates which reduced the fund's borrowing costs. But Senior Vice President Mathew Sheridan fails to mention the discount and potential action to correct it. Unfortunately for shareholders, they have not issued a press release concerning the most important event of 2013: the existence of a right to request a vote. We have also spent hours on the AllianceBernstein website. The section, Prospectus & Shareholder Resources, does not contain either a prospectus or a mailing address to submit a request for a vote. It does have section on Statement of Policies and Prodedures (sic?) for Proxy Voting. The section concerns how AllianceBernstein votes client securities. We frankly are not concerned with how they vote ACG's holdings of US Treasury securities. With less than five business days left to contact AllianceBernstein (AB) to exercise the option, management has not provided shareholders the important information in a press release, an S.E.C. filing, or on its website. Providing crucial voting instructions is not something that should be left to us and other Seeking Alpha readers.
We reached out to AllianceBernstein and spoke with Bill Siebold. He did not have any information as to why they have not publicized the existence of the right or how to contact the firm. He stated that he was confident that they did what was required. He informed us that the address to write in to request a vote is:
AllianceBernstein Investments
Attention: Board of Directors
ACM Income Fund - ACG
1345 Avenue of Americas
New York, New York 10105
The section titled Proxy statement on ACG's website does contain the following statement: "As a registered investment adviser, AllianceBernstein L.P. (AllianceBernstein", "we" or "us") has a fiduciary duty to act solely in the best interests of our clients." A disturbing fact pattern leads one to legitimately question whether they are actually doing that. ACG's shareholders have not been able to sell their holdings unless they pay an de facto penalty of several years of interest income. In total, ACG's shareholders has suffered an approximate $200 million market to market loss for the past three years. In the process, the fund's advisor has been able to maintain its asset under management and related income.
The first data point is AllianceBernstein's prior history of violating their fiduciary obligations, as detailed in the 2003 settlement with the New York Attorney General. Clearly, the failure to publicize the right to request a vote is another one. Finally, management and the board's decision not to repurchased any shares or launch a tender offer as specified in the prospectus is also concerning in light of the chronic discount.
We are only investment analyst. Therefore, we are not in a position to determine whether their actions are improper in any way. We still firmly believe in the merits owning ACG and believe that its 13% discount will narrow in a reasonable time frame. There are several paths to that result and it is hard to predict which one will occur.
Background:
The AllianceBernstein Income Fund was created in 1987 to provide investors with a low risk investment vehicle. The fund primary holds US Treasury bonds, along with investment grade and non-investment grade debt. For the past three years, the fund has traded at a substantial discount to its net asset value, an average 10.6% and at a minimum 7%.
The fund's prospectus contains numerous provisions that protect shareholders from the funding trading at large discounts for extended lengths of time. The fund's directors are supposed to consider making open market repurchases and consider launching a tender offer at NAV every quarter as detailed in the prospectus dated November 2001:
In recognition of the possibility that the Fund's shares might trade at a discount to NAV, the Fund's Board of Directors has determined that it would be in the interest of Stockholders for the Fund to attempt to reduce or eliminate such a market value discount should it exist. To that end, the Board presently contemplates that the Fund would from time to time take action either to repurchase in the open market or to make a tender offer for its own shares at NAV. The Board presently intends each quarter to consider the making of a tender offer. The Board may at any time, however, decide that the Fund should not make a tender offer.
Since that prospectus was issued, there have been over 50 quarterly meetings by the board of directors. The board has not acted even once to repurchase shares or to make a tender offer. For some years, the fund traded at a premium to NAV and so neither was a valid option. During periods of higher interest rates and lower discounts, the decision is understandable as the economic benefit is small. The simplest measure of the economic benefit is payback period, the number of years that the gross assets take to earn the same amount as repurchasing shares at a discount. For example, in 2007, when the discount was 5% and the 10-year US Treasury yielded approximately 5%, the payback period was about one year.
For the last three years the payback period generally exceeded four years. For the past six months, the payback period exceeded six years. In times of a long payback period, ACG's management led by Douglas Peebles and Gerson Distenfeld and ACG's Board led by William Foulk decision not to repurchase any shares is simply incomprehensible.
We think that Peebles, Distenfeld, and Foulk are smart enough to understand the economic advantage of a share repurchase at a large discount to NAV in a period of low interest rates. The usual reasons to decide against a repurchase, such as unrealized capital gains, illiquidity in a fund's underlying investments, investment management fee discounts, or small float do not apply in ACG's case. Given the long payback period and lack of a valid economic reason against a buyback, one sadly has to ask whether their collective decision improperly involved preserving fee income to AllianceBernstein.
Bill Siebold of AllianceBernstein said that for "whatever reason they choose not to do so."" He could not offer any particular investment theory. Our call to AllianceBernstein Senior Vice President Mathew Sheridan was not immediately returned. Perhaps they have a legitimate theory as to why purchasing assets that will earn 18% over seven years is preferable to repurchasing shares that offer that immediately. We have searched conference calls, annual reports, the website, and press releases and have not found any mention of that theory though.
In 2003, AllianceBernstein paid a heavy price for putting its interest above those of its clients. The firm paid $600 million to resolve state and federal accusations regarding its mutual fund operations. The settlement included $250 million in restitution and penalties. Commenting at the time, New York Attorney General Eliot Spitzer said, "the desire for increased fees led managers and directors to abandon their duty to investors and to condone improper and illegal activity." Alliance's chief executive at the time, Lewis Sanders, acknowledged the failure and fired the chief operating officer, John Carifa, and the chairman of the mutual fund unit, Micahel Laughlin. Sanders said, "Our supervisors' utmost obligation to protect the best interests of our clients cannot be compromised at any level of the firm for any reason."
Fortunately for ACG's investors, the ability of regulators, attorney generals, and prosecutors to spot and prosecute wronging in the financial sector is increasing. In our last article, we noted two cases. AllianceBernstein's Chairman Peter Kraus worked for many years at a senior level at Goldman Sachs. Goldman recently paid a $550 million fine to settle S.E.C. charges related to a complex product, ABACUS 2007-AC1, that was sold to sophisticated investors in Europe. The S.E.C. is actually more concerned with products such as ACG, as it is owned by small US investors and is quite simple.
AllianceBernstein Income Fund's Chairman William Foulk was formerly deputy Comptroller for the State of New York. Alan Hevesi, the Comptroller for the State of New York, was sentenced to 1 to 4 years in jail in 2011 for allowing outside compensation to effect his decisions, otherwise known as pay to play. As we noted in our last article, Foulk received only about $12,000 from ACG, but over $450,000 from the AllianceBernstein fund complex in 2012. His ratio of compensation from ACG to Alliance Bernstein fund complex is typical of ACG's entire Board. Given the Board's repeated failure to act, one has to wonder whether outside compensation was a factor in its decisions.
It really is not surprising when someone or organization with a poor record of achievement gets it wrong again. It is the expected case. Exhibit A of this phenomenon is the pre Dodd Frank SEC failing to stop the Madoff fraud after receiving a letter from Harry Markopolos. The letter appropriately titled, "The World Largest Hedge Fund is a Fraud" made a crystal clear case. But the underpaid, inexperienced, and overworked SEC staff completely missed it.
The cases that are shocking to us are when a smart, well-educated executive or highly regarded firm such AllianceBernstein crosses the line for small incremental revenue. We always wonder what exactly the person was thinking. Aside from the two cases discussed earlier, there are two more recent cases of smartest guys in the room getting it dead wrong that may offer insight.
Vague Laws: Steven Cohen graduated from the Wharton School of the University of Pennsylvania, founded one the most successful firms on Wall Street, and became a billionaire. Given his education and wealth, one wonders why he allowed his firm and employees to cross the line. The best explanation we have found is that he wrongly believed the laws regarding insider-trading laws were vague. Given that view, he did not think his firm was actually doing anything wrong. Here is the have to see it to believe it video from a deposition taken in 2011 of Cohen when he discusses his understanding of the insider trading laws. Cohen says, "The way that I understand the rules on trading on inside information is its (sic?) very vague."
http://www.cnbc.com/id/101176780
Of course, Cohen could afford the best legal talent on the planet to educate him on the law. However, as the recent convictions of SAC and it employees demonstrate, the laws are not actually that vague. SAC Capital recently agreed to pay a $1.8 billion in fines and to close to outside investors. Six employees have pled guilty in criminal court. A seventh, portfolio manager Michael Steinberg, was recently convicted of five counts at trial relating to insider trading. An eighth employee, Mathew Martoma, is scheduled to go to trial January 6th.
ACG's management and directors may believe they are meeting their obligations under laws that are vague, as they understand it. For example, there is no specific law that says one must repurchase shares if the discount exceeds 10%. Given how expensive Cohen's misinterpretation was, they may want to get a second legal opinion.
Mosaic Theory: Raj Rajaratnam earned an MBA from the Wharton School of the University of Pennsylvania, founded Galleon Group, and became a billionaire. In 2011, he was convicted on 14 counts of conspiracy and securities fraud relating to insider trading and was sentenced to 11 years in prison. He had to pay fine a $10 million fine and forfeit $54 million in illegal gains. Again, it is not logical for an executive worth over $1 billion to engage in illegal activity for an extra $50 million.
His defense was that his trades were based on information gathered from a variety of sources and therefore sources inside a given company were not sufficiently important to be material. The jury was able to spot the obvious lie. For example, Rajaratnam's lawyers argued he purchased shares 175,000 shares of Goldman Sachs on September 23, 2008 at 3:57 pm based on his meeting with the firm's President, Gary Cohn, on July 31, 2008. The jury agreed with prosecutors, who argued that his decision was more likely based on a tip from a Goldman Sachs director that he received on September 23, 2008. His friend, Goldman Sachs director Raj Gupta, phoned Rajaratnam at 3:53 pm with information about a $5 billion investment from Warren Buffett that would be announced at 6 pm. Yes, there were legitimate reasons for Rajaratnam's trading decisions, but those were far outweighed by his illegal ones.
ACG's management and board may also gain comfort with some farfetched reason for not announcing the vote and economic rational for not repurchasing shares. Given the usual ones (unrealized capital gains, illiquid investments, etc) do not apply to ACG, the reasons have to be remote. Maybe they believe that regulators such as the SEC will agree with them that other motivations that are quite obvious, such as a desire to preserve fee income, did not factor into their decision making process.
The entire matter could be easily solved today with a simple press release, such as:
Dear AllianceBernstein Income Fund Holder:
We urge you to request a vote to change ACG from a closed-end fund to an open-end fund. If we receive requests from 10% of holders, we are likely to recommend the conversion given the chronic discounts, persistent in both falling and rising interest rate environments. The discount has only continued to grow worse over time.
Moreover, we believe that a person that does not vote is not making an affirmative vote to receive a worse outcome. Therefore, non-votes will not be counted as voting for remaining a closed-end fund.
At AllianceBernstein, we are acutely aware of our fiduciary obligations. Conversion to an open-end fund may result in lower fees to our firm, but we pride ourselves on only considering our clients interests.
Happy Holidays.
Sincerely,
William Foulk, Jr.
The final mystery of this failure to act is with the firm's compliance department. One has to wonder why they have not taken more action. Michael Steinberg, the recently convicted SAC portfolio manager, once joked that, "our legal eagles (a reference to SAC's compliance department)…fortunately, to my knowledge, those guys don't actually work there anymore." Sadly, that looks to be the case at ACG as well.
Disclosure: I am long ACG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Additional disclosure: This article is not investment advice or legal advice. Please do your own work and or consult a professional. Investing in ACG involves risk, including loss of principal.
This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at fivefilters.org/content-only/faq.php#publishers.
Aucun commentaire:
Enregistrer un commentaire