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Activist Track: Korea Equity With a Twist

This column was originally published on RealMoney on Aug. 2 at 12:46 p.m. EDT. It's being republished as a bonus for readers.

The Korea Equity Fund (KEF) is facing a battle between its two largest shareholders, as well as the fund's management that could potentially create a buying opportunity in the next few weeks.

All of the parties involved agree on one thing: There are reasons to be bullish on Korea. In the past few years I've been a perma-bull on Korea. The country is experiencing massive growth, its market has traded at single-digit P/Es for years, and the market has experienced a largely artificial selloff due to worries about either North Korea or potential slowdowns in China. Neither of these worries has done much to slow down the growth in GDP in South Korea.

But that raises the question of how best to invest in that premise. An examination of the battle taking place on KEF provides a clear idea on how to play that fund, which is one tool investors have used to access the Korean market, and could lead to ideas on other closed-end funds as activists stretch their muscles and aim for more liquidations.

Over the past year, KEF has gone through an activist battle involving Harvard College, which owns 29% of the fund, and the Nierenberg family of funds, which owns 7% of the shares. Within the past week, this battle has taken another interesting twist.

Last July, I wrote A Primer on Closed-End Fund Arbitrage and explained why closed-end funds often trade at discounts to their net asset value. These discounts could range anywhere from 0% to 30% and usually reflect the cost of liquidating the portfolio, taking in a discount for taxable gains as well as reflecting a discount for illiquid securities or lack of trust for the managers. Often activists will accumulate shares of a closed-end fund if it's trading at a larger-than-normal discount to its NAV and then pressure the fund to become an open-end fund, which would immediately eliminate the discount.
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