Record IPO may bring closed-end-fund resurgence

PHILADELPHIA — The successful launch of the closed-end Alpine Total Dynamic Dividend Fund — its initial public offering raised $4.04 billion last month, making it the largest closed-end-fund IPO ever — may signal a resurgence in closed-end funds, industry experts say.
Last year, there were just 21 closed-end-fund launches, raising $10.2 billion. That was down considerably from 2005’s totals of 46 new funds and $19.9 billion, said Tom Roseen, a Denver-based analyst with Lipper Inc. of New York.
A rush to market?
But if closed-end-fund providers believe they can replicate the success of the new Alpine fund — advised by Alpine Woods Capital Investors LLC of Purchase, N.Y. — this year could see a rush to market by such funds.
“I think we might see a few more big deals,” said Cecilia Gondor, an executive vice president at Thomas J. Herzfeld Advisors Inc. in Miami.
The Alpine deal itself came in the wake of another major closed-end-fund IPO. At the time, the $2.63 billion raised in November for the Eaton Vance Tax-Managed Diversified Equity Income Fund from Eaton Vance Corp. of Boston was the largest closed-end-fund IPO ever.
What’s the attraction for investors?
“It just looks like investors are interested in funds that can offer a nice yield,” Ms. Gondor said.
And closed-end funds, because of their structure, are well suited to strategies that seek yield, she said.
For example, the Eaton Vance fund was yielding just over 9% last week.
The closed-end Alpine Global Dynamic Dividend Fund, which follows a strategy similar to — but more conservative than — the new Alpine Total Dynamic Dividend Fund, was yielding more than 8%.
Such yields are particularly attractive in today’s market environment, Mr. Roseen said.
Bond yields are relatively low and not very attractive on a risk/ reward basis, he said.
But the success of the IPO for the Alpine Total Dynamic Dividend Fund was not just the result of its anticipated ability to generate attractive yields, said Samuel A. Lieber, chief executive of Alpine Woods.
“We were able to do so well because we came up with a concept that offers not only income but capital appreciation potential,” he said.
The fund combines four investment strategies — growth, value, special dividends and dividend capture rotation — to maximize the amount of dividend income and to identify companies globally with the potential for dividend increases and capital appreciation. The growth and value components to the strategy are pretty straightforward.
The special-dividends component seeks to include companies that return large cash balances to shareholders as one-time dividend payments due to a restructuring or recent strong outperformance.
The fund’s dividend capture rotation strategy pairs similar stocks, and it captures multiple dividends per year versus four quarterly dividends.
Traditionally, investors buy a dividend-paying security and hold it over the course of a year, capturing four quarterly dividends.
Alpine’s approach will endeavor to capture more dividend payments with the same investment capital by rotating between securities with similar characteristics throughout the year.
“It’s arguably a unique strategy, and it certainly is innovative given its nuances,” said Marc R. Rappaport, a senior managing director with Alpine Woods.
Big improvement
It’s a big improvement over other closed-end-fund strategies designed to generate yield such as the use of covered calls, he said.
The problem with that strategy is that although it can produce a great-er yield, that yield comes at a cost. It limits the upside potential of the fund if stocks for which the options are written go up. If that happens, the fund is at risk of losing the stock if it rises above the strike price of the call.
At least one financial adviser, however, said he wasn’t sure the strategy being employed by the
new Alpine fund was much of an improvement.
“Sounds speculative to me,” George Cole Scott, president and portfolio manager of Closed-End Fund Advisors Inc. in Richmond, Va., said about the fund’s dividend capture strategy.
“That turns me off,” he said.
It seems inevitable, however, that more such funds are on the way.
There are at least six closed-end funds in registration that plan to offer some kind of dividend capture strategy, Mr. Rappaport said.