Closed-End Funds, Part I

Insured Municipal Income Fund Inc. (the “Fund”) (NYSE:PIF) is a closed-end management investment company, advised by UBS Global Asset Management, that normally as its title suggests invests most of its assets in tax exempt munis.

On Friday it announced its results for the quarter that ended June 30. Earnings come to 23 cents per common share.

Some of the shareholders aren't happy. Two institutional shareholders in particular among the unhappy may be familiar to readers of this blog: Bulldog Investors General Partnership has proposed its own nominees for the board, and Karpus Investment Management has suggested terminating the investment advisory agreement with UBS Global.

I see a press release, via BusinessWire, in which UBS/Insured Mutual trumpets the support it has received from two advisory services, but I don't see any date for the upcoming meeting at which such things would be voted upon.

It's worth keeping an eye on. Karpus, of Pittsford, New York, has a fascinating distinctive strategy. I believed, when I started work on this entry, that I had discussed that strategy in this blog before but now I can't find any such entry. Anyway, here's the gist of it: Karpus focuses on closed-end funds. It looks for cases in which stock price has been below net asset value, and it moves in to demand certain measures aimed at narrowing that discount: a tender offer, open-ending, merger with another fund, or liquidation.

In its target space, in other worlds, there is a simple metric for valuation, and that is precisely the strength of the appeal Karpus can make to shareholders.

My own attention was drawn to this strategy in 2005, when I wrote a review of a then-new book by Stephen Ross, NEOCLASSICAL FINANCE. Ross defended modern financial theory. including the hypothesis of efficient markets, against challenges from "behavioral economics," and as an illustration of those challenges, and of why he finds themunpersuasive, he cited the "closed-end fund puzzle."

I'll summarize Ross' argument, and return to Karpus as a practitioner of Ross' theory, in tomorrow's entry.