Fitzgerald Angrand Re: Issues on Closed End Fund Discounts Background Information on Closed End Funds Similar to other

publicly traded securities, the share price of a closed-end fund fluctuates and is generally determined by supply and demand forces in the marketplace. As a result, the price at which investors buy and sell closed-end fund shares in the secondary market may differ from the fund's net asset value (NAV), thereby creating discrepancies between NAV and share price or, in other words, a premium or discount. A closed-end fund's NAV represents the aggregate of the reported share prices of the securities owned by the portfolio plus all other assets, minus liabilities and divided by the total number of shares outstanding. The actual share price of a closed-end fund may, at any time, be above (selling at a premium) or below (selling at a discount) its NAV. For example, if the price of a fund share is $15 and its NAV is $20, then the closed-end fund is selling at a discount of $5 per share (or 25% discount). On the other hand, if the share price is $21, the closed-end fund is selling at a premium of $1 (or 5% premium). Prospective shareholders pay particular attention to discounts because they create the perception of a potential buying opportunity. For example, an investor may look for a fund valued at $20, but only being traded at $15. On the other hand, discounts may erode value. Shareholders of a fund whose trading price is lower than its NAV are not realizing the true value of their investment. While the deep discounts might seem tempting, experts caution in many cases that it may not be wise idea for investors to dive in. This is true because there may be a good reason a particular fund to trade at a wider discount than another fund. Issue 1 The problem with persistent, deep discounts When a closed-end fund trades at a discount, the marketplace values the underlying assets of the fund at less than its NAV price. Factors that can lead to modest or temporary discounts include o Overall market sentiment o General supply/demand imbalances. Temporary or small imbalances should not necessarily be troubling to closed-end fund shareholders, because they are the norm. Certain closed-end funds, however, trade at deep discounts (10% or more) for extended time periods. o Such discounts are often caused by negative shareholder sentiment resulting from various factors.

Poor long-term fund performance High management fees High portfolio manager turnover Poor corporate governance Unsatisfactory shareholder communication Little trading liquidity in the fund When discounts remain deep for an indefinite period, shareholders end up being, in some sense, perpetually underpaid for their shares. o If shareholders need to sell for whatever reason, they will not receive the NAV of their shares, but rather, will receive the NAV minus the discount. If the discount permanently remains large, then the discount amount becomes lost to the investor, as he or she never gets the opportunity to sell shares in the fund for what the underlying assets are worth. o Another problem is that they often reflect failed policies by the asset management firm. Discounts can be a symptom of greater problems at the fund An example of these concerns is that 72% of closed-end funds use leverage. Investors worry that heavily leveraged funds will have a hard time rolling over the debt, much of it short-term, and will resort to more expensive financing, which cuts into returns.

Issue # 2 Managements lack of incentive on its own to remove a funds discount A funds management has a variety of policies that they can implement to reduce a funds discount and improve overall fund performance o Improving management performance o Reducing management fees o Strengthening corporate governance o Increasing communication with shareholders o And other proactive measures such as large tender offers and share buybacks However, management is normally paid the same fees regardless of whether its fund trades at a deep discount or at a premium, thus management often has little incentive on its own to remove a funds discount. Since shareholders are the persons most likely to be harmed by a deep discount, shareholders need to encourage the fund to reduce the discount and improve overall fund performance. When shareholders perceive a problem, they should provide constructive feedback to the fund.

Issue # 3 Fund boards may worry less about the valuation of portfolio securities owned by closed end funds

One of the hallmarks of the fund industry is the unrelenting commitment to market the fair value of the fund, in order to value the fund as accurately as possible Some funds however, may worry less about the valuation of portfolio securities owned by closed end funds than mutual funds o Logic seems to be that accurate valuation for closed end funds is less important because closed end funds are purchased and sold at market prices rather than NAV.

Issue #4 Inaccuracies in a funds NAV greatly affects market price and the overall performance of the fund, and can lead to false interpretations of a discount amount. Closed end fund market prices correlate, at least to some extent with the NAV, thus NAVs can affect the market prices at which closed end fund investors purchase shares A funds investment fees are calculated on the basis of its NAV, not its market price, so an inaccurate NAV can lead to inaccurate fee amounts. Furthermore, the existence of discounts and premiums are heavily relied on by shareholders attempting to determine the value of a particular closed end stock. The extent to which a discount or premium is valued is based on the NAV price, thus making a funds NAV price, as provided by management, increasingly important. Problems arise when the NAV price is a subject of debate. o A close end fund may consist of both restricted and unrestricted securities. o While the valuation of publicly quoted unrestricted securities is relatively unproblematic, the determination of the fair value of restricted securities is not. Section 2(a)(41) of the 1940 Act defines value (a) with respect to securities for which market quotations are readily available, the quoted market value of such securities, and (b) with respect to other securities and assets, fair value as determined in good faith by the board of directors. These securities include certain investments in private placements, illiquid securities, and venture capital investments. Managerial discretion largely centers on estimating market values of securities for which publicly quoted values are not readily available, i.e., restricted and illiquid securities. Closed-end fund manager compensation is by law based on accounting measures of fund size rather than share price performance Managers thus have incentives to use their discretion towards maximizing reported asset values

Issue #5 A great percentage of companies tending to sell at discounts rather than NAV reflects a sentiment of fund mismanagement The price of a closed end fund reflects the markets expectations of cash flows to be received in the future. For this reason, the NAV need not equal the market share value

When the shareholders expect inferior management they bid down the fund shares Assuming active management, discounts arise from excess management fees, or more generally speaking, mismanagement. Prospective shareholders who are not fully aware of excess management fees and its impact on the NAV, may incorrectly interpret a discount or premium amount.

Background Information on Standstill Agreements A Standstill Agreement is an agreement between two business entities that are contemplating entering into a transaction together and desiring to prevent one another from negotiating a similar transaction with a third party during the period of negotiations. For example, in negotiations for a merger or acquisition, the target and the purchaser may enter into an agreement where they each agree not to solicit or embark on acquisitions from or of other parties. A standstill agreement can also be an instrument of a hostile takeover defense. Some courts have recognized that in the realm of takeovers or acquisitions, Standstill Agreements may be subject to abuse where one party uses it to prevent the management of a target corporation from seeking favorable bids for its purchase, and thus breaching its fiduciary duty to obtain the best possible price. Issue # 1 Fiduciary Duties for Activist Shareholders Some courts have held that majority shareholders, like corporate officers, owe a fiduciary duty of loyalty to minority shareholders that preclude them from using their positions as controlling shareholders to control corporate activities to benefit themselves alone or in a manner detrimental to the minority. Any use to which majority shareholders put the corporation or their power to control the corporation must benefit all shareholders proportionately. Activist majority shareholders, who make use of standstill agreement to obtain benefits for themselves, such as a lower discount rate in the context of closed end funds, may be violating their fiduciary duty to the other shareholders and the corporation.

References Anabtawi, Iman Fiduciary Duties for Activist Shareholders Stanford Law Review http://legalworkshop.org/2009/04/10/fiduciary-duties-for-activist-shareholders October 6, 2011 Boudreaux, Jenneth J. Discounts and Premiums on Closed-End Mutual Funds: A Study in Valuation. American Finance Association The Journal of Finance (p. 515-522) Bricker, Robert and Chandar, Nandini Incentives, Discretion, and Asset Valuation in ClosedEnd Mutual Funds. Journal of Accounting Research 40 (4) (September 2002) Donohue, Andrew J. Luncheon Address at the 2007 ICI Closed End Fund Workshop < http://www.sec.gov/news/speech/2010/spch042410ajd.htm> October 6, 2011 Rozeff, Michael S. Closed-End Fund Discounts and Premiums. Pacific-Basin Capital Markets Research, Vol. 2, (1991) Weisenberger Closed End Funds and the Mysterious Premium/Discount <http://www.closedendfunds.com/Learn/Content/ResearchArticles/CEFunds04_99.fs> October 6, 2011