Cornerstone Progressive Return Fund: Clever IPO Distribution Strategy

Cornerstone Progressive Return Fund (ticker:CFP) is one of those funds that consistently pay out a large managed distribution that is mainly return of capital. Some unsophisticated retail investors find this attractive and bid the fund price up to a premium over NAV, even though a distribution like this does not make you any richer—it is like moving money from your left pocket to your right pocket.

The CFP fund management figured out a clever strategy to extract this large premium over NAV. Here are the players involved:

1)      The CFP asset manager is Ralph Bradshaw. Bradshaw is also a principal in the firm BPM Partners Ltd.

2)      Ron Olin is the brother-in-law of Ralph Bradshaw and runs the Doliver Capital Fund that specializes in closed-end fund investing.

Based on SEC filings, Ron Olin, BPM Partners and Doliver Capital purchased nearly 100% of the IPO shares of Cornerstone Progressive Return Fund. By October 31, 2007, Doliver Capital owned about 99% of the shares. Since these shares were purchased at the IPO price, the premium over NAV paid by Doliver Capital was about 5%.

Because of CFP’s high managed distribution policy, CFP has generally maintained a high premium over NAV. For the last 52 weeks, the average premium over NAV has been about 48%. Doliver Capital has been gradually reducing their share ownership by selling to unsophisticated investors at a high premium over NAV. There was a period of time in late 2008, right after the Lehman bankruptcy, when the CFP premium over NAV shrunk dramatically, and CFP even sold at a discount to NAV for a brief period. When this happened, Doliver Capital dramatically reduced their selling of shares until the premium over NAV was re-established in 2009.

Here is a table that shows how the Doliver Capital CFP share ownership has gradually been reduced over time. Note how the selling increases significantly whenever the premium over NAV widens dramatically which has happened recently.

Date Shares Owned by Doliver Capital CFP Premium over NAV
10/31/2007 9,218,665 19.11%
12/31/2007 9,202,165 18.79%
3/31/2008 9,149,965 28.93%
6/30/2008 9,059,765 43.93%
9/30/2008 9,036,165 -4.84%
12/31/2008 9,004,565 -0.84%
3/31/2009 8,766,865 34.02%
6/30/2009 8,131,764 63.78%
9/30/2009 6,347,657 45.61%
10/30/2009 5,633,386 39.50%
11/30/2009 4,928,410 47.41%

Once the Doliver Capital position has been completely distributed, Ralph Bradshaw will continue to earn the locked in management fees indefinitely from the investors who purchased the shares at a premium from Doliver.

Full Disclosure: I have no position in CFP.

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4 responses to “Cornerstone Progressive Return Fund: Clever IPO Distribution Strategy

  1. Closed-end_Trader

    You have great incite on this “clever” strategy. It would seem to me as this large institution is selling at this huge premium, it is more likely this fund will under perform its benchmark going forward as the premium contracts. You state you have no position but would a short sell of this fund be appropriate with perhaps a hedge?

    • Closed-end_Trader: I think it is too early to short sell CFP, since Doliver Capital still controls about 50% of the float. The shares are hard to borrow, and Doliver would stop selling shares if the premium started dropping. This tends to prop up the stock price. A better time to sell short CFP is when the Doliver Capital holding moves close to zero. That is when the managed distribution may be lowered as well.

  2. Closed-end_Trader

    When you wrote this article CFP was over $9/share. Two months later, it is just over $6/share. You nailed this one on the head. I hope you were able to a least take a small short position. It’s always worth reading your blog. You provide excellent information.

  3. No, I did not sell short CFP. I was afraid of a forced buy-in. Most of my CEF holdings are in IRA accounts, and I own over 50 issues. But knowing what to avoid can be helpful even if you don’t take a short position.

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