Open-End or Closed-End Fund: That is the Question

In response, Karpus has announced its support for an opposition slate put forward by another hedge fund, Opportunity Partners LP. The general partner of Opportunity Partners is Kimball & Winthrop Inc. Kimball & Winthrop's President Phillip Goldstein organized the opposition slate in collaboration with Arthur Lipson, principal of Western Investment LLC, Salt Lake City.

The roots of the dispute reach back to July 28, 2003. On that day, ZTR was trading at a 9.1% premium over its net asset value. But after the close of trading, its board announced an end to its policy of each year distributing 10% of net asset value in cash. It said that hereafter the distribution would be based on net investment income earnings. "That's what really caused the fund shares to plummet," said Mr. Bartlett in an interview. By the end of trading July 31, the stock's price had fallen 12.3%.

On April 8, 2004, ZTR backed off of its variable-distribution policy. It announced a return to a fixed 10% distribution. But, Mr. Bartlett said, that the fund fell short of a return to the pre-July 28 status quo. The new distribution would consist of 7% cash, 3% ZTR stock, rather than the earlier 10% cash policy. Still, the return to fixed distribution was well received by the market, lessening the size of the discount to net asset value.

In a letter to shareholders on April 29, Daniel T. Geraci, president of ZTR, asked shareholders to return their proxy card to management and made his case that open-ending the fund will have negative consequences for shareholder value. He contended that if the fund were open-ended, "as short-term speculators like Goldstein exit and redeem their shares, your Fund may be forced to pay for redemptions by selling portfolio securities at inopportune times and incurring increased transaction costs. Your Board's decision to recommend against open-ending your Fund was a unanimous decision by the Fund's six directors, five of whom are totally independent. On the other hand, Goldstein and his cohorts are driven by self-interest and desire for short-term profits."

Mr. Geraci also argued that it would be wrong for the fund to return to a cash-only distribution policy because that would force shareholders to pay additional taxes and because "the dissidents' proposals would subject your Fund to unnecessary risk by encouraging speculative investments in junk bonds, derivatives and other high-risk securities in an effort to reach a mandatory cash dividend."

Mr. Goldstein replied to that reasoning in his own letter to shareholders May 4. He wrote that if ZTR were an open-ended fund, its shares would now be worth US$5.62. Instead, they are worth US$5.16. "Would you rather own a stock worth $5.62 or one worth $5.16? This is not a trick question."

ZTR is just one of a group of funds managed according to the market-timing models of Dr. Martin Zweig, who has a doctorate in finance, writes a finance newsletter and has been a frequent guest on PBS' "Wall Street Week" since the 1970s.

Mr. Bartlett said that in his view the performance of the Zweig funds in general has not been outstanding of late, but that is not the reason Karpus has entered the ring in this fight. It was the vote ending fixed distribution and the price plummet that drew Karpus' attention to ZTR. As to the outcome of next week's meeting, he declined to predict an outcome, but said officials were "hopeful." He said that "the proxy context has definitely improved the odds of something being done" to change either the board's composition or its policies.

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