We are voting against Nuveen’s proposal to restructure the Nuveen North Carolina Municipal Bond fund (NNC) and we think you should join our dissent. Here’s why.
Our investments in closed-end funds were a big contributor to performance this year. We have discussed this trade openly with peers – see this article in Grant’s published in September 2018 – and we highlighted it again in our most recent mid-year letter available here. In short, the confluence of potential tax reform, increased municipal bond issuance, and rising rates all led to over-supply and some of the cheapest discounts to NAV that we have seen in the space. We aggressively added to our holdings throughout 2018 and built a significant position in the Nuveen North Carolina Municipal Income Fund (NNC) during the year.
At the time, NNC was trading at a big discount to its underlying NAV. It still is. Many fund management companies work to close this discount to NAV when it becomes excessive; some do so by choice, others require a “gentle prompting” from active investors. Nuveen is endeavoring to do this with NNC by closing the fund and rolling the assets and investors into one of their larger, nationally focused muni-bond funds – NEA.
How We See the Proposal
The facts as we see them are as such:
- Current NNC shareholders are being asked to pay the cost of the exchange/reorganization.
- Current NNC shareholders, which reside in NC, will no longer own a fund exempt from NC state taxes.
- NEA is of lower credit quality than NNC with approximately 25% of the holdings concentrated in California and Illinois.
- NEA trades at a slightly narrower discount to NAV; although, in our opinion, this difference is not sufficient compensation to warrant the exchange.
The primary benefit we see is that NEA is a larger, more liquid fund, but it’s still a fund trading near a double-digit discount to NAV. In our opinion, the current Management Proposal does little to compensate the holders of NNC for owning an asset well below its market value and, in fact, it perpetuates this inefficiency.
Closing the Discount to NAV
There are a number of more effective ways to close this discount to NAV, compensate current shareholders, and reduce management costs at Nuveen. Some of the options we’ve proposed with management are summarized below:
- Instead of swapping shares into another closed-end fund that trades at a similar discount to NAV, tender the NNC shares at NAV.
- Convert shares of NNC from a closed-end fund into an open-end fund which effectively eliminating the discount to NAV.
- Offer NC shareholders the same terms that were offered to CT shareholders, where investors in NTC were offered a 10% cash distribution as incentive to vote and converted into a national fund trading much closer to NAV.
At least for the time being, Nuveen is unwilling to entertain any of the above options in their “Management Proposal.” As a result, we are voting against the proposal. We are advising our clients to vote against the proposal. And we are asking other shareholders of NNC to do the same.
If the proposal is voted down, and we hope it is, we will be happy to continue holding our triple-tax free NC municipal bond fund at a sizeable discount to NAV. If the management proposal passes, we will ultimately own a higher yielding, more liquid, national fund at a similar discount to NAV. We will cross that bridge when we get there. In the meantime, please feel free to give us a call if you are an NNC shareholder and would like to discuss this further. Your vote is due by September 22nd so don’t delay.