Of the more than 5,000 mutual funds, ETFs and closed-end funds in today’s universe, the overwhelming majority are somewhat cookie cutter alternatives to an easily accessible index, which makes it difficult for investors to uncover truly unique funds for their overall investment strategy. Even in an increasingly crowded universe, there are still managers who take a different approach and demonstrate value to shareholders. The Special Opportunities Fund, Inc. (NYSE: SPE) run by Phillip Goldstein of Bulldog Investors, LLC, is one of these funds. For the past several years, it has delivered total return through opportunistic investing in less followed securities, such as closed-end funds, business development companies, special purpose acquisition companies and common stocks.
The fund has significantly transformed since launching in 1993. Previously known as the Insured Municipal Income Fund, Inc., the fund initially formed as a municipal bond fund and was managed as such for 16 years. In 2009, the fund wallowed at a significant discount to the underlying municipal bonds. Following a campaign led by Goldstein, shareholders voted to remove the existing manager and nominated Bulldog to take its place. Bulldog provided investors the ability to liquidate their position near net asset value (NAV), leaving about $100 million in the fund. In 2010, Goldstein transitioned the fund to an opportunistic strategy, focusing on some of the lesser known corners of the public markets to which most investors lack exposure and changed the name of the fund to better align with the new approach.
While the only benchmark cited in the annual report is the S&P 500, the fund is by no means a substitute for the broader market. I believe the strategy has the ability to make money in a variety of market conditions and exhibits less volatility than the S&P 500. In the time since Goldstein took over management, the fund has performed impressively, especially if you consider the additional return sources, such as the convertible preferred issues and tender offer.
In 2012, SPE issued convertible preferred shares to common shareholders. Eighteen months later, the preferred converted into common shares, which provided a meaningful return in excess of the stated dividend. In July 2016, the fund issued another convertible preferred that was well over-subscribed and has since traded up, even in the face of dropping bond prices. Most recently, in October 2016, the fund issued a tender offer, allowing investors to tender 18% of their common holdings of SPE at a three percent discount to NAV, which at the time amounted to $15.61 per share—or nine percent higher than today’s price. These factors have added several percentage points of total return for the participating investor that is not clearly reflected in a simple review of the funds’ performance.
Goldstein is an activist investor that has led many successful campaigns by recognizing deeply undervalued companies and fighting for shareholders’ best interests across segments of the market. The portfolio mix will change as opportunities arise where Goldstein believes he can extract value. Currently, he has positions in off-the-run companies, including Stewart Information Systems and Emergent Capital. He owns a liquidating REIT, Winthrop Realty Trust and two closed-end funds that recently executed successful liquidity events, Virtus Total Return Fund and Nuveen Global Equity Income Fund. SPE currently trades at a 12% discount to NAV, on top of the existing discount of the underlying securities.
Since transitioning to an opportunistic strategy, SPE has largely flown under the radar. In today’s world, it is hard to find unique publicly-traded opportunities. SPE provides a hedge fund-like investment strategy, but with daily liquidity and much lower fees. Additionally, it has performed better than many of the hedge fund indices over the past seven years. My firm is a large shareholder of the fund, and we have confidence that SPE will continue to offer unique value in the markets ahead.
Read more posts from Maury on Forbes.comRelative Value Partners merged with Kovitz Investment Group Partners, LLC as of August 2024. All Insights are opinions of the author as of the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete, and should not be relied upon as such. This information is subject to change without notice at any time, based on market and other conditions. Past performance is not indicative of future results, which may vary.