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On Monday August 30th, I shorted Delaware Investments Dividend and Income Fund (DDF) at $7.76. Friday’s published Net Asset Value had been $7.15. This is a short I have wanted to open for more than a week but for which I have awaited what I perceived as a pricing cushion.
In my view, a very important factor to DDFs valuation prospects is in the process of changing. More specifically, DDF’s Board appears to be demonstrating a greater interest in the security of Advisory fees and lesser interest in supporting the market valuation.
A special meeting of shareholders is scheduled to be held November 17th. The primary purpose demonstrated by the proxy is to “amend certain conditions under which the Fund will conduct a tender offer”. Shareholders are being asked to approve diminished thresholds for annual tender offers.
More specifically, shareholders would not be protected by tender offers unless the fund trades at an average discount to Net Asset Value (“NAV”) of 10% or more during the Board designated measurement period. In my view, DDF market pricing has benefitted from that threshold being 3%. DDF market pricing may be also be benefitting by monthly distributions, 62.4% (.0359/.0575) of which has constituted Return of Capital (“ROC”) for each month of 2010. ROC had constituted 43.5% (0.0250/.0575) of the final monthly distribution paid in 2009. ROC history taken from distributions history at CEFConnect.com.
Announcement of the meeting and proposal positions the prospect of a “higher threshold (as) more in line with current industry practice,” among other things (Business Wire, Delaware Investments Dividend and Income Fund, Inc. Announces Special Shareholder Meeting, August 19, 2010).
There has been no demonstration by the Board in the announcement regarding anything having to do with the monthly distribution. Whether DDFs current distribution is sustainable is a question I will not answer on behalf of DDF. In my experience, governance choices are important subjects which justify my own contemplation of broader relevance.
In my own experience, the potential intentions of any Board to increasingly serve interests of the Advisor, or to use shareholder assets to fund solicitation of shareholder votes that diminish shareholder protection against adverse valuations are relevant. My opinions about DDF are merely opinions, and “Mr Market” will prove some or all of my opinions to be poorly founded.