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Closed-End Salomon Brothers Fund Attracts Proxy War

Activists tired of its NAV discount threaten to block its transfer to Legg Mason.

Elliott Associates, a $5.2 billion hedge fund, is leading a proxy fight against the closed-end

Salomon Brothers Fund


managed by Citigroup Asset Management.

As is often the case with closed-end funds trading at a deep discount to net asset value, the activists' agenda is to narrow -- and in this case, to eliminate -- the discount. Right now, the fund is trading at 8.5% below net asset value.

A similar battle took place recently between Sowood Capital Management -- Harvard's investment arm -- and the

Korea Equity Fund


, in which Nomura Asset Management, the fund's manager, succeeded in blocking the liquidation of the fund.

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This time, the activists have a bargaining chip that may play in their favor.

On Thursday, Elliott filed a proxy indicating that at a special shareholders meeting slated for Oct. 21, it will vote against a management agreement needed to effect the transfer of SBF's assets to Legg Mason (the deal is part of the firm's June asset swap with



). By blocking the transfer of the SBF assets to Legg Mason, the activists are putting pressure not only on the fund's board but also on Citigroup.

Elliott, one of the oldest U.S. hedge funds, is the largest shareholder in the SBF fund with 5.88 million shares, or 6% of the fund's outstanding shares. In its proxy, it says it is "deeply concerned with the fund's meaningful discount to NAV."

Since 2002, the average discount for SBF has been 14%. Elliott acknowledged a reduction of the discount since the beginning of August. But it attributes the narrowing to the actions of the shareholder activists, not to the fund management.

Elliott isn't alone in the campaign. On Thursday, Karpus Management, a $1.1 billion, Pittsford, N.Y.-based investment manager that holds a 1.50% stake in SBF, filed a Schedule 13D expressing "frustration over the failure of management to adequately address the wide and persistent discount to NAV."

The Elliott proxy does not say what actions the firm recommends. But the documents do mention possible options, including partial and full tender offers; a liquidation; a conversion to an open-end fund; and a tax-free merger into an open-end fund.

Mary Athridge, a spokeswoman at Citigroup Asset Management, and Scott Tagliarino, a spokesman at Elliott, declined to comment.