The structuring of the funds lies at the heart of the dispute. China World and Dragon are both closed-end funds, which trade on an exchange typically at a “discount” to the shares’ actual value. Open-end funds are purchased from and sold to the fund itself, which guarantees that shares are instantly redeemable for their net asset value.
HMC has complained that the funds’ discounts have been excessive and has proposed various ideas to raise share price other than ousting management, such as open-ending the funds and converting them into an interval fund that is slowly liquidated as management buys back shares.
Since HMC began to publicly pressure Templeton, the funds’ discounts have decreased considerably. The China fund, which currently trades at a three percent discount, averaged a 12 percent discount last year, while the Dragon fund, which currently trades at a 12 percent discount, averaged a 14 percent discount last year, according to Morningstar.
The settlement dictates that Templeton will propose open-ending the smaller China World fund with HMC’s backing at the fund’s annual meeting in April, which would eliminate the fund’s discount. If the proposal succeeds, which is likely, HMC will divest itself of its 30% holding of China World stock within 30 days.
The larger Dragon fund will offer to purchase 15% of the fund’s shares at 92.5% of its value by the end of April and may make additional offers. If the fund’s performance holds constant, that price will exceed the Dragon fund’s current price due to its discount. HMC would then liquidate its 14% stake in the fund.
HMC will also refrain from investing in Templeton funds or lobbying Templeton shareholders for four years, according to the terms of the deal.
While the settlement should have few long-term ramifications for HMC, Templeton or the mutual fund industry as a whole, it sends the message that it remains tough for shareholders to impose their will on fund managers, Cassidy said.
“The fact that from [a fund’s] point of view [HMC was] not successful might be a source of a little bit of comfort,” he said. “Even the very large and deep-pocketed investor doesn’t necessarily always win.”
—Staff writer Stephen M. Marks can be reached at marks@fas.harvard.edu.