John Hancock Funds is merging five closed-end stock funds with similar investment strategies in an effort to cut expenses and increase liquidity.
The boards of the $227 million
Patriot Premium Dividend Fund I, the $183 million
Patriot Global Dividend Fund , the $157 million
Patriot Preferred Dividend Fund and the $227 million
Patriot Select Dividend Trust approved the reorganization into the $298 million
Patriot Premium Dividend Fund II in December, and a prospectus is being mailed to investors this week. Shareholders will vote on April 23.
All five of the funds are subadvised by Gregory Phelps and Mark Maloney of Sovereign Asset Management, a wholly owned unit of John Hancock.
If the merger is approved, shareholders of the first four funds will collect newly issued shares of the Patriot Premium Dividend Fund II. Those shares will equal the aggregate net asset value of the shares held at the time of reorganization. Each fund's decision will be made independently of the others' and will proceed even should one or more funds refuse the reorganization.
Andy Arnott, vice president of product management and product development at John Hancock, says trading in a single, larger fund would be more liquid than it is in the five individual funds. The rationale "is pretty straight-forward. It's about expense savings and market liquidity," he says. The company chose the Patriot Premium Dividend Fund II as the surviving investment vehicle because it is the largest of the group.
Unlike open-end funds, which issue and redeem shares upon demand at their net asset value, closed-end funds issue a fixed amount of shares that trade throughout the day like stocks. This structure makes it easier for the funds to stay fully invested, potentially boosting returns, since they don't have to keep cash on hand to meet redemptions or put large amounts of new money to work. But shareholders who want to cash out have to find another investor willing to take the stock off their hands. When trading is illiquid, they may have to be willing to accept less than the value of the fund's holdings.
All five of the Patriot funds being merged have persistently traded at discounts to their net asset values. As of March 13, the Premium Dividend II's shares traded at a 12.2% discount to their NAV, while Premium Dividend I was trading at a 13.48% discount, Global Dividend traded at an 11.28% discount, Preferred Dividend Trust traded at a 6.73% discount, and Select Dividend Trust traded at a 13.44% discount.
So far, the filing of the proxy hasn't had much effect on the market for the funds or their respective discount rates. But "it'll be a different scenario when people actually receive their proxy in the mail," Arnott says.
He says combining the funds would allow the management company to spread certain fixed costs over a larger asset base, lowering expenses.
David Kathman, an analyst at Morningstar, says the funds are good candidates for a merger. "They're taking these five funds that are heavily into utilities and dividend-focused," he says. "They're all comparable in size and look pretty similar."
Pending shareholder approval, John Hancock expects the reorganization of the Patriot Premium Dividend Fund I to close on Monday, May 7. Select Dividend Trust is anticipated to close on May 16, Preferred Dividend Fund on May 29 and Global Dividend Fund on June 4.
Including the four funds planned to merge into Patriot Premium Dividend II, Hancock offers 13 closed-end funds with total assets of almost $6.51 billion, as of Feb. 28, according to data from Morningstar. After the reorganization, Patriot Premium Dividend Fund II will have around $1.09 billion in assets, or about 17% of the company's closed-end fund assets.