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CEF Update: A Merger and an Unusual Rights Offering

Steven Pikelny

Cohen & Steers announced last week that shareholders of Cohen & Steers Dividend Majors (DVM) and Cohen & Steers Total Return Realty (RFI) approved a consolidation of the two funds. The firm expects the reorganization to take place by June 2014, with RFI as the surviving fund. Both funds are relatively small, with RFI containing $128 million in net assets and DVM containing $215 million in net assets. Considering that neither fund uses leverage nor has a substantial balance of undistributed net investment income, the merger should be relatively straightforward.

Rights Offering
Cornerstone Progressive Return (CFP) announced that May 1, 2014, will be the record date for shareholders to participate in a 1-for-3 rights offering. For every three rights held by shareholders, they will have the option of purchasing a new share at the greater of 107% of net asset value or 90% of share price. As of Monday's close, CFP traded at a 25.3% premium.

While this corporate action should be accretive to the fund's NAV, and may benefit shareholders in the short run, investors should remain skeptical of this fund for long-term investment purposes. CFP is one of the most egregious perpetrators of destructively returning capital. In other words, investors lured in by the fund's 17.6% distribution rate at share price should note that this is mostly smoke and mirrors.

For fiscal 2013, roughly two thirds of the fund's distributions were composed of return of capital, which is hardly an unusual practice for this fund. For example, roughly two thirds of its 2012 distributions were composed of return of capital, as was half of its 2011 distributions and 95% of its 2009 distributions. Considering that the fund's NAV has depreciated substantially over this time--about 72% from its $14.96 IPO NAV in September 2007--it is safe to classify this return of capital as destructive. Making matters worse, CFP has made these distributions while trading at a substantial premium.

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Steven Pikelny does not own shares in any of the securities mentioned above.