A major shareholder is up in arms about an abrupt change in investment strategy at the $797 million ( WIW) Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund 2 (WIW).

In May, the three-year-old closed-end bond fund announced it would alter its investment strategy so that it could allocate as much as 40% of assets "below investment-grade securities" securities, or junk bonds. The fund is also removing its 80% minimum allocation to inflation-protected securities, or TIPS. The fund is also changing its name to the Western Asset/Claymore Inflation-Linked Opportunities and Income Fund, to better reflect the new strategy, effective Aug. 7.

The new strategy will make the fund significantly riskier. TIPS are considered very safe because they are both backed by the U.S. government and indexed to inflation. By comparison, junk bonds offer higher returns, but investors are taking on both the risk that the issuer will default and that rising inflation will erode the value of their returns.

"I've never seen such a drastic change to investment policy where the manger didn't seek shareholder approval," says Cody Bartlett Jr., investment strategist and senior fixed-income analyst for Karpus Investment Management. "It's a bait-and-switch" scheme.

Karpus, a money manager based in Pittsford, N.Y., is the fund's second-largest shareholder, with a 6.5% stake. It has filed a complaint with the Securities and Exchange Commission.

Bartlett says Karpus has a lot of pension fund clients that are restricted from investing in high-yield bonds and or bonds linked to other currencies. So it will have no choice but to dump its shares once the new investment strategy is in place. And since the fund is currently trading at a 10.13% discount to its net asset value, according to Morningstar, Karpus would have to leave a lot of money on the table.

Closed-end funds issue a fixed number of shares that trade throughout the day on an exchange, like stocks. So when too many investors head for the exit, share prices can fall below the value of a fund's holdings.

Bartlett adds that since the investment change was announced, the fund's discount has widened by 1.5 percentage points.

Karpus has asked the fund to reconsider the changes, or at least open them up to a shareholder vote. "Our primary purpose of owning shares in WIW is the 80% of the fund that must be allocated to U.S. TIPS, which provides for high credit quality and low risk for our conservative investment clients," Bartlett says.

He speculates that Western Asset/Claymore may be changing its investment strategy to differentiate itself from its "sister" fund, the ( WIA) Western Asset/Claymore U.S. Treasury Inflation Protected Securities Fund (WIA). The sister fund has assets of $373 million and currently trades at a 10.24% discount to its NAV.

Bartlett believes it would be more appropriate to merge the two funds. By changing WIW's investment strategy, "the trustees can continue to receive two directors' fees, auditors can continue to receive two audit fees, the attorneys can continue to receive two attorney fees, and the New York Stock Exchange can receive two listing fees," the letter said. "All at the expense of shareholders."

Bartlett concedes that the investment change isn't illegal and that litigation on the matter is unlikely.

Western Asset/Claymore did not return calls seeking comment.

You can listen to Bartlett's thoughts on activist investing at this link.
Michael Katz joined TheStreet.com in 2007. Michael has previously worked as a reporter at Forbes and an editor for two custom publishers, SmartMoney Custom Solutions and HNW Inc. He also worked in London as a freelance media reporter and correspondent for Broadcasting & Cable magazine. Michael has a B.A. in English from the University of Virginia.