I’m back, bitches. See? I told you guys I wouldn’t abandon you completely.

(Goes for cigarettes, never comes back)

Let’s talk a little about an interesting special situation I came upon. The Swiss Helvetia Fund (NYSE:SWZ) is a closed-end fund that has been around since 1987. As of December 31st, 2016, it held 38 stocks, six direct private equity investments, and one participation in a private equity limited partnership. The fund’s largest positions include Novartis, Nestle, UBS Group, and something called Roche Holding. These top four positions account for about 42% of assets.

There’s really nothing special about the fund. It has a 1.19% (in 2016) management expense ratio, which is pretty expensive. It’s not hard to get exposure to a basket of Switzerland-listed equities in 2017. It really just exists to generate fees for Schroder Asset Management, who manages the fund.

Enter Bulldog

Bulldog Investors have been forcing these shitty closed-end funds into action for years now.

Their schitck is more predictable than my laziness. They establish a position in a closed-end fund without a lot of insider ownership (i.e. 99% of them). They amass about 10% of the outstanding shares and then start stirring the pot. As the largest shareholder, they usually get exactly what they want.

Bulldog has set its sights on the Swiss Helvetia Fund. The main guys involved with Bulldog have amassed 2.1 million shares, or about 7.5% of the 28.2 million shares outstanding. Karpus Investment Management owns 1.4 million shares, and 1607 Capital Partners owns 3.2 million shares. Lazard Capital Management also owns 2.4 million shares.

All four of these companies have a history of being activist investors who are willing to rattle a few chains. Together, they own about one third of the fund’s shares.

Bulldog recently wrote a letter to the fund’s management, saying it intended to nominate “one or more” of their partners to the fund’s board of directors. They also plan to ask the current shareholders to vote on whether they support continuation of a bylaw specifying director qualifications.

In short, Bulldog wants to take over the Swiss Helvetia Fund’s board of directors, and it likely has the votes to do so.

There’s more. In the last two weeks, both the Fund’s Treasurer and Chief Legal Officer have resigned. And most importantly for us, the Fund has announced it will buy back up to 10% of its shares on April 24th.

The opportunity

As I type this, Swiss Helvetia Fund shares currently trade hands at $11.59 each. They have a net asset value of $12.76 per share. Thus, shares trade at a 9.2% discount to their current value.

The tender offer has been made at 98% of net asset value, meaning the bid will come in at $12.51 per share. This will change over the next month, of course, since the Fund tracks a basket of publicly-traded stocks.

Say you buy 500 shares today at $11.59. Assuming $7 in commission, your total cost comes in at $11.60. The sale would be at $12.51 (remember, brokerages don’t charge a commission to tender shares), giving us a profit of $0.89 per share, or 7.8% in a little less than a month.

The risk

There are two major risks. The first is underlying asset risk. If the Swiss Franc gains ground against the U.S. Dollar in the next month, that would depress the price of the Fund. The smart move would be to simultaneously short an equal amount of shares, thus locking in the spread.

The far bigger risk is not getting enough of the deal to make it worthwhile. The Fund will only tender up to 10% of outstanding shares. Logic would dictate some of the major shareholders would try to tender at least a portion of their shares. Remember, they own a third of the company.

Here are a few scenarios.

Tendered Our Fill Profit*
10% 100% 7.8%
20% 50% 3.9%
30% 33% 2.6%
50% 20% 1.56%

*The profit column assumes the spread stays the same as today.

There’s no way we can tell how many shares will be tendered. But we can use a similar tender offer to guess how many shares will be tendered.

Each year, the Canoe EIT Income Fund (TSX:EIT.UN) does a similar tender offer. It limits the annual redemption to 10% of total units at 95% of net asset value. 42.8% of shareholders tendered their shares in 2016.

If a similar percentage tendered their Swiss Helvetia Fund shares, our profit would be about 2%, barring any crazy moves.

You might not think that’s very exciting, but keep in mind that you’ll make 2% in just 26 days. That works out to a 28.1% annual return. Not bad. And that’s pretty much a worst case scenario outcome. If the big shareholders decide to hang on, the profit could be much larger.

Disclosure: Nelson does not own any shares listed, but will likely buy Swiss Helvetia Fund shares in the next few days. 

Tell everyone, yo!