The below text is licensed to Covestor Ltd. (“Covestor”), by Dan Plettner. Such text may be disseminated only by Covestor. Dan Plettner invests and receives income for securities research, including “buy-side” research. Dan licenses his own real time trading data to Covestor Ltd. (“Covestor”). Covestor is a Registered Investment Advisor that uses Dan Plettner’s data to create the Core, Long Short Opportunistic, Tax Advantaged Income, and Taxable Income models for its clients. Dan’s words should not be misconstrued as investment advice.
August 10, 2010
Covestor LIVE: Why have you reduced your position in AWP?
Dan’s response: Primarily, Discipline. Investment Theses are sometimes subject to what I call thesis drift. When that happens, I find it appropriate to wholly re-evaluate the security, and my perspective of it. As part of that process, I reassess the position altogether. If no position is justified by a fresh analysis, I find it most prudent to accept that I was wrong on a particular call, and seek greener pastures. I’m not in love with myself or any thesis. I want to be objective when continuously evaluating securities and I want to be objective in critiquing my process and each thesis.
Secondarily, I have been interested to reduce Beta as the high end of a recent trading range. And, I seek to remain alert to other opportunities in choosing which ideas are more desirable to my investing goals.
Covestor LIVE: What went wrong in your AWP thesis?
Dan’s response: My original thesis had done work for which I’m proud in evaluating the ability of AWP to significantly increase distributions. Closed-End Fund Analysts often look at the accounting term “UNII” (Undistributed Net Investment Income) to evaluate the prospects for distribution changes. I went far past UNII, which in AWP’s case I believe to primarily reflect accounting and engineering decisions.
Trustees and Boards of Directors have oversight, and responsibility for governance decisions such as distributions at Closed-End Funds, just like dividends at traditional public companies. I am proud of my effort in observing the publicly available self portrayals as from Alpine to contemplate the timing of AWP reassessing their distribution. Intensive observations will not cease to be integral to my research process. Still, I do not have any control as to the consistency between the governance plans demonstrated to shareholders at the time of a distribution cut and shareholder report, versus the governance path actually taken by a Closed-End Funds’ stewards.
Beyond my analysis, my AWP relative valuation thesis was dependent on two primary beliefs. First, I believed that the Alpine Funds traded at premiums or discounts largely based on their distributions. My conviction there is unwavering. Second, I originally believed that Alpine was among the Closed-End Fund families that seek always to serve shareholders in contrast to a sole focus on maximizing billable assets. I believe it best to look toward Alpine’s actions to demonstrate whether that second essential was void of merit.
AWP most recently (for June, July and August 2010) declared a 5.9% annualized (NAV basis) as its monthly distribution. That declaration to ordinary shareholders was made after the markets closed on May 21st. At the time, sister fund AOD’s most recently declared distribution amounted to 26.6% annualized on AOD then current NAV ($5.40). Alpine has deflected my requests for a measure of velocity at which each fund uses the firm’s dividend capture trade rotation, but the strategy would appear to have been used at a staggering pace. The distributions of AOD and AGD have both changed, adversely, since. However, I continue to find an ongoing disparity apparent. I have no intent to disparage Alpine with details in an interview where such details are not central to the subject, but I do have conviction that I now understand the root causes.
Covestor LIVE: So what now?
Dan’s response: I reevaluate the merits of owning, having no position, or even shorting AWP with a new set of observations and reposition myself accordingly. There is a whole universe of opportunities out there, and I’m not constrained to just Closed-End Funds, much less Alpine Closed-End Funds.
Some or all of my investment theses will always prove wrong. I try to avoid emotional attachment to a thesis, regardless of my confidence in my process of thesis construction. I do not believe emotions serve portfolio performance. I also try to assess where I might have observed contrary signals, in effort to continue growing as an investor. While I have no control over how good or bad the processes and principals of any single Closed-End Fund are, I do seek to hold myself to a standard of ongoing improvement. I have no influence over Alpine. I have every influence over my own investing process.
Covestor LIVE: What do you think of AWP now?
Dan’s response: It is always possible that Alpine’s actions change. And they may serve shareholders exactly as I originally expected. But I’d be naïve to hold my breath from here.
As a rule of thumb, when Closed-End Funds choose to forsake their shareholders, shareholders eventually observe the captivity reflected in the discounted market price and choose to free themselves. Shareholders capture the market value’s discount to NAV, enhancing their own returns rather than enriching those holding them captive. The process is generally referred to as “Activism”.
There are numerous exceptions to that rule of thumb. Some discounted funds may be better viewed as instruments of purgatory than well-intentioned Activism candidates. Those I avoid at any discount. I won’t get into the specific exceptions, as I don’t believe they apply here.
In my eyes, AWP now may best fit the profile of a long-range Activism prospect. The valuation gap is quite large among funds where future Activism and shared-benefits thereof appear plausible. The key word is prospect. I believe to be pretty familiar with several reasons why all shareholders will want to cease enriching Alpine Woods Capital Investors, and instead restore shareholder value themselves. Having said that, AWP is not at present among the top holdings in my account portfolio where I implement a strategy of investing in funds which fit an Activism Profile. A portfolio management criteria I choose to be mindful of within that strategy is when an Activism Profile opportunity becomes timely.