UBS Global Asset Management next week hopes to fend off a shareholder revolt seeking to wrest control of a closed-end municipal bond mutual fund from the beleaguered bank.
With $193.3 million in assets, the Investment Grade Municipal Income Fund Inc. invests in long-term munis, mainly hospital, university, airport, and power bonds from California, Texas, Illinois, Washington, and New York.
UBS became adviser when it bought Mitchell Hutchins Asset Management Inc. as part of its purchase of PaineWebber in February 2001. Mitchell Hutchins was a subsidiary of PaineWebber, which launched the fund 1992.
The fund's two biggest institutional shareholders - Karpus Management Inc. and Western Investment LLC - have launched a coup seeking to boot UBS as adviser to the fund.
Western Investment, which is based in Salt Lake City, proposes ousting the fund's six-member board and nominating six new directors of its own.
The dissidents' contentions center principally around two complaints, according to information in proxy filings made to the Securities and Exchange Commission.
First, the fund's shares, which trade on the New York Stock Exchange under the ticker symbol PPM, have persistently traded at a significant discount to the value of the fund's portfolio.
Over the last five years, the fund's shares have traded an average of 11.1% cheaper than the value of the fund's assets, according to the Closed End Fund Association. The average discount for leveraged muni funds is 4.4%.
Late last year, the discount reached nearly 29%. That means that for every $1 of assets, the fund's stock commanded barely more than 71 cents in the market.
In one of a series of back-and-forth proxy filings, Western Investment claims the fund's discount has been second-worst out of 263 closed-end muni funds over the past four years. The worst, it says, is another UBS-advised fund.
Western Investment contends the discount reflects investors' expectations that the fund's board will never take steps to eradicate the discount, such as repurchasing shares.
The board counters in its filings that the fund's discount is comparable to similar closed-end funds and does not warrant the drastic measure of sacking the adviser.
The median discount for closed-end muni funds with "investment programs comparable to that of the fund" is 14%, the fund claims, citing data from Lipper Inc.
The dissident shareholders' second complaint is their claim that legal and ethical travails at UBS AG, the adviser's parent company, render it unfit to advise a mutual fund.
UBS and its subsidiaries in the past year have landed in hot water with a federal grand jury and attorneys general in New York and Massachusetts over alleged tax-sheltering and misleading marketing of auction-rate securities - the very type of debt the fund uses to enhance returns on its portfolio.
The board portrays Western Investment and Karpus Management as rustlers trying to make a quick buck at long-term shareholders' expense.
The shareholders do not suggest a better adviser, the board points out, and threaten to leave the fund without one as they conduct a search.
Further, the nominated board members don't have experience overseeing mutual funds, the fund claims, and would have more loyalty to raider hedge funds than to the fund's shareholders.
Two leading proxy advisory firms, RiskMetrics Group and Glass, Lewis & Co., have advised shareholders against voting for the proposed changes.
Glass Lewis did advocate electing Arthur D. Lipson, who runs Western Investment, to the board. Having one activist on the board would help keep the other five members honest, Glass Lewis argued.
Other than that, both firms argue the dissidents have not offered compelling reasons for change. Discounts to asset value are common in this investment class, they say, and nothing suggests replacing the adviser would eliminate the discount.
Shareholders will vote on the proposals at the fund's annual meeting Thursday at the CBS Building in Midtown Manhattan.
Karpus owns 10.4% of the fund's stock and Western Investment owns 5.5%, according to Bloomberg LP.
