C-Suite Buy of the Week: General American Investors, Inc. ($GAM)

Things just got interesting at a 97-year-old mutual fund.

General American Investors is a closed-end fund that opened in 1927 during the boom years of the 1920s.

When this fund started investing capital for its shareholders, bathtub gin flowed, and the flappers did the can-can.

General American Investors GAM is a closed-end fund, so thanks to the fickleness of retail investors and the psychological soup that is the stock market, the fund can and does trade at a discount to the value of the stocks, bonds, and cash it owns.

Source: Benzinga Pro

Currently, the fund trades for 14.5% less than its net asset value, which is a slight improvement over the 10-year average.

The fund is a growth stock fund and owns many of the big growth stories of the day, including Amazon AMZN, Apple AAPL, and Microsoft MSFT.

Despite that, its long-term performance has lagged the S&P 500 SPY.

General American is a permanent capital vehicle as a closed-end fund, and no funds can be withdrawn.

Investors can sell shares on the New York Stock Exchange like any other security.

For 97 years, the fund’s management company has collected fees regardless of performance.

Activists such as Phillip Goldstein of Bulldog Partners have tried to force the fund to take steps to narrow the discount in the past but have never succeeded.

That may be about to change.

Earlier this month, Boaz Weinstein of Saba Capital filed a 13D announcing he owned 5.3% of the fund and intended to talk with management about narrowing the discount. He particularly mentioned converting General American to an open-end fund, thereby forcing the shares to trade at NAV, or liquidating the fund and returning the cash to shareholders.

While other activists might not have succeeded, Weinstein is a different matter.

He has been battling the major mutual fund groups over closed-end fund discounts for years now and winning.

Boaz Weinstein is used to winning.

He was a chess master at the age of 16.

Weinstein’s Wall Street career began at Deutsche Bank, where he quickly rose through the ranks. By age 27, he had become one of the youngest Managing Directors in the bank’s history.

Thanks to a strategy of buying undervalued credit default swaps and selling private ones, Saba Capital had a monster year in 2020 and was named hedge fund manager of the year by Risk.Net.

Closed-end fund (CEF) activism has become a significant strategy for investors like Boaz Weinstein and others who seek to profit from persistent discounts to Net Asset Value (NAV). These campaigns follow a structured approach to force corporate actions that close the gap between market price and NAV.

Weinstein has become the 800-pound gorilla of the closed-end fund market, forcing several funds to convert to open-end or exchange-traded funds.

Others have tried to appease him by conducting tender offers or buybacks that force the trading price of the shares closer to their net asset value.

Several have made substantial increases in the dividend to attract buyers and narrow the discount.

At the heart of Saba Capital’s dominance in closed-end fund activism lies its substantial capital base and sophisticated infrastructure. The firm maintains sufficient scale to pursue multiple campaigns simultaneously, typically taking ownership stakes of 5-15% in target funds. This capacity for multiple, meaningful positions sets Saba apart from smaller activists who might be constrained to fewer opportunities.

Saba’s established market presence creates a self-reinforcing advantage. Fund boards recognize the firm as a serious and professional actor, while proxy advisors understand their approach and methodology. These relationships, built over years of consistent engagement, facilitate more productive discussions and often lead to faster resolutions.

The firm’s network extends beyond direct stakeholders to include strong relationships with other activists, institutional shareholders, and industry service providers. This network provides valuable intelligence, deal flow, and potential partners for larger campaigns. When Saba identifies an opportunity, it can quickly assess the landscape and identify potential allies or obstacles.

This gives investors an attractive opportunity at the current price.

You will own some of the best stocks on the market today.

You will pay about $0.85 on the dollar for what they are trading today.

As of this writing, you will pay $53 for a little over $62 worth of stocks and cash.

If nothing happens, you will likely make a little less than the index rate of return.

If Weinstein is successful, you will make a little less than the average rate of return plus about a 17% gain from the discount elimination.

Given Weinstein’s success rate in closed-end fund activism, it is a smart bet.

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