DV Journal

Activist hedge funds are increasingly targeting closed-end funds (CEFs) to enrich themselves while ignoring the interests of retirees and retail investors. These corporate raiders threaten to undermine the entire CEF asset class, which is vital in many retail investors’ portfolios and the broader capital markets.

In recent years, activists have exploited a loophole in section 12 of the Investment Company Act to amass significant stakes in closed-end funds. This maneuver has led to a decline in CEFs, dropping from 495 in 2018 to 402 in 2023.

Notably, three primary firms — Saba Capital Management, Bulldog Investors, and Karpus Management — account for more than  80 percent of the surge in hostile activism.

Saba Capital Management (“Saba”) has framed its actions as promoting good corporate governance. However, its proxy contests against 10 BlackRock CEFs aim to engineer a liquidity event for short-term gains. Such a move could adversely affect long-term investors, particularly retirees and middle-class Americans, who rely on CEFs for stable fixed income and targeted growth.

The Increasing Investor Opportunities Act, passed by the U.S. House of Representatives in March with bipartisan support, seeks to address this issue by closing the loophole, thus preserving stability for investors in CEFs.

CEFs hold significant importance for long-term investors due to their unique advantages compared to open-end funds. Unlike open-end funds, which continuously issue new shares based on the net asset value (NAV), CEFs have a fixed number of shares that trade on stock exchanges throughout the day, like stocks. The fixed supply means that their market prices are driven by supply and demand, often resulting in prices that can be above (“premium”) or below (“discount”) the fund’s net asset value. Common types of CEFs include real estate funds and municipal bond funds, but they can also be a mix of stocks and bonds aimed at generating income. These investment avenues are particularly appealing to pension funds and retirement accounts.

Moreover, CEFs can invest in less liquid assets, such as private equity or startups, which are usually inaccessible to the average retail investor. This capability allows CEFs to offer investment opportunities typically reserved for high-net-worth individuals and institutional investors — thereby democratizing access to potentially lucrative markets. Additionally, most CEFs distribute regular dividends, making them attractive to retirees. In 2022, CEFs returned $16.7 billion to retail investors, with about 72 percent of these returns coming from income distributions.

According to Investment Company Institute data, households owning CEFs have a median age of 50 and a median household income of $100,000, with 39 percent being active retirees. Therefore, Saba targets income-generating investments that middle-class Americans and retirees rely upon.

Saba aims to profit from the discrepancy between the market prices and the net asset values of BlackRock’s CEFs, employing aggressive strategies such as proxy contests, shareholder proposals, director replacements, and conversions into open-end funds. While these actions can temporarily boost the fund’s market price, they generally yield unfavorable outcomes for most investors.

Specifically, forced liquidation could trigger untimely taxable events, necessitate reinvestment into potential higher fee or riskier alternatives, or disrupt established investment strategies. These strategies often deviate from the fund’s income generation objectives tailored to retirees and long-term retail investors. 

A law firm aptly notes, “The predictable end result here … (is) coercing closed-end funds that cannot adequately protect themselves into delivering a short-term profit for the activist manager, its other like-minded allies, and their high-net-worth investors, at the expense of the long-term retail investing public.”

Despite Saba’s claims of eliminating discounts to net asset value, its takeover of two CEFs trading under the tickers BRW and SABA resulted in substantial discounts post-takeover, contrary to their assertions.

Saba’s activism is purely to pad its pockets. Its targeting of the EF space and its confrontation with BlackRock are not in the best interests of retail investors and retirees. Congress should pass the Increasing Investor Opportunities Act to prevent Saba and other corporate raiders from targeting CEFs.

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The case for Joe Biden to accept the inevitable dictates of his age and not run again is persuasive. Too much rests on the health and fitness of the president to turn it into a kind of roulette: When will his number come up?

Worse, what if Biden fails mentally and stays in office incognizant of his condition? Being the president of the United States is the most demanding and most responsible job in the world.

Winston Churchill got a second term as prime minister of Great Britain in 1951, and lots of stuff went wrong, from immigration policy to the growth of unchecked union power. History’s greatest prime minister had lost his acuity.

As I am older than Biden, I can say he should quit. I love to work, but there’s the rub: Not all people and all work are created equally. What I do isn’t critical and doesn’t decide the nation’s future or war and peace.

No one would suggest that an artist toss the easel at a predetermined retirement age. Noel Coward, the great English entertainer, said, “Work is more fun than fun.” That depends on the work.

Age is a complex equation for society, and retirement is a nettlesome problem. France is in revolt over President Emmanuel Macron’s move to raise the retirement age from 62 to 64. Very reasonable, most Americans say.

The issue in France is simple: The French can’t afford huge state pensions any longer. There aren’t enough people at work to pay for those who have retired on their nearly full salaries. You can vote the population rich, but you can’t vote in new, young taxpayers to keep them rich. When the Social Security system falters in the next decade, America may be staring at the same sums as Macron.

Mandatory retirement is a crude way to manage the retirement dilemma. Some workers are genuinely unable to work into their 70s and 80s because their bodies, their minds or both are worn out. Others are at their most productive.

My father’s mind was fine, but he was a mechanic who had done everything from building steel structures to working in mines to repairing cars. His body failed around the age of 6o. He had been doing manual work since he was 13 years old, and he couldn’t bend, twist, delve, lift, climb, stretch, grab or do any of the myriad things he had done all his life to earn a living. He had to work in a school and then a shop; he loved the school but not the shop. But he had to work. That is what he did: He got up every day and went to work.

He had worked so long and so hard, primarily self-employed, that he hadn’t had time to learn leisure — to play golf, to watch ball games, to read for recreation, or even to learn how to socialize. That came with work or didn’t happen; friends were people at work.

A friend of mine, a nuclear engineer, reached mandatory retirement age and fell apart, much as my father nearly did. He, too, had no interests outside of his family and work and was lost in the post-job world.

Something of this same problem exists for people leaving the military. Their life is the military, and then, at an early age, there is no more of that life, their life.

When it comes to Biden, things are quite different.

I know the president slightly, and I like him personally. He loves the job. He has been at the peak of power for a long time. When his term ends, he should adjourn to his beach house in Delaware and write his memoirs.

Maybe someone will teach Biden how to play boules, a European form of bowls played by older people in parks. French boules aficionados would be happy to teach him the game. The French have a lot of time in retirement to perfect their play and travel to beach destinations. They would love to bring their skill to Rehoboth Beach, Delaware. Maybe I should join them.

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A Pew Charitable Trust study released earlier this month features the eye-popping headline “Pennsylvania’s Looming $17.8 Billion Fiscal Shortfall.”

It finds as many as 2 million private-sector workers in the commonwealth don’t have access to a workplace retirement plan. As a result, many aren’t saving enough for their golden years. That “could lead to $14.6 billion in increased state spending and $3.3 billion in lost state tax revenue” over the next decade or so, the study warns.

“Pennsylvania’s population aged 65 and over is projected to grow from 2.49 million in 2020 to 3.04 million in 2035, and the number of the state’s vulnerable older households—those 65 and older with less than $75,000 in annual income—is expected to increase by 17 percent during that time,” Pew reports. “That could mean bigger costs for state welfare programs.”

While the number of elderly Pennsylvanians will rise between now and 2035, the number without a big enough retirement nest egg will also grow unless people can be persuaded to save more, according to the study.

Pennsylvania State Treasurer Stacy Garrity says the challenge of paying for state services for the elderly has been papered over with one-time COVID aid from Washington, D.C. But as the retirement savings deficit builds over the next few years, “We will reach a fiscal cliff. It is common sense that we should prepare for it now,” Garrity added.

Meanwhile, says John Scott, director of Pew’s Retirement Savings Project, the percentage of households relying on retirement income is growing faster than working households. In 2020, there were 43 households age 65 and older for every 100 ages 20-64, Scott reports. By 2035, that number will grow to 56 households age 65 and older for every 100 working-age households—a 29 percent increase—meaning that there will be fewer taxpaying households ages 20-64 to support a growing elderly population.

“The tax base of the working households to elderly households is not growing as quickly. So this will place more stress on taxpayers,” Scott says. He says vulnerable elderly households in the commonwealth are those with annual incomes of less than $75,000. The average retiree will fall short of that annual number by about $8,000 by 2035. Scott says that means many retirees without adequate retirement nest eggs will need a higher level of financial support from the government.

The state, Scott adds, should try to ensure that more people headed for retirement are saving enough to live comfortably. To prevent that he believes systematic savings plans should be widely available.

Garrity says workers are “15 times more likely to save for retirement” when there is a workplace payroll deduction retirement plan option. Not saving enough for retirement, will “have a huge impact on their personal lives and on the government of the state of Pennsylvania,” Garrity said at a news conference discussing the Pew study.

How did we reach this point?

“The problem of undersaving in Pennsylvania is 44 percent of our private sector workforce doesn’t have access to a workplace retirement savings plan. That’s a huge number,” says Garrity.

“These savings shortfalls,” according to the study, “could lead to increased pressure on public assistance programs, reduced tax revenue, and decreased household spending by retirees while shifting the growing fiscal burden to a shrinking population of working-age taxpayers.”

The problem of retirement undersaving is a national one, Scott notes. About one in three private industry workers in the United States lack access to retirement programs through their employers. One in three workers in Pennsylvania has the same problem. However, “increased savings could effectively address this debt,” Scott says.

Financial planners say the most effective way to accumulate enough for retirement or any long-term goal is a program of regular investments compounded over long periods. The longer one invests, they say, the more likely one is to enjoy one or more bull markets.

Garrity argues Keystone Saves, a measure proposed in the last legislative session in Harrisburg, would reduce the problem. Keystone Saves is a state-sponsored retirement plan that would fund retirement plans through payroll deductions. Garrity’s office estimates that, if a program such as Keystone Saves were adopted, the state’s fiscal burden “could be avoided entirely if eligible households contribute about $100 a month. Some employers now don’t offer retirement plans because start-up or maintenance costs are too much for them.”

A Keystone Saves plan was considered in the last legislative session but didn’t pass.

A Garrity spokeswoman says she expects the bill will be reintroduced this session. She thinks the measure will have bipartisan support and the governor will likely support it.

A spokesman for Gov. Josh Shapiro didn’t respond to inquiries from DVJournal.

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