UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
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The Central European Equity Fund, Inc.
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Form of stockholder letter and Institutional Shareholder Services Proxy Analysis
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The enclosed form of stockholder letter, together with the proxy analysis of
Institutional Shareholder Services dated May 24, 2002, was released to the
following stockholders on May 30, 2002:
Harvard Management Inc. GSG Capital Advisors
600 Atlantic Avenue 16830 Adlon Road
Boston, MA 02210 Encino, CA 91436
Att: Mr. Jeff Larson
Madison Ltd. City of London Investment Management
170 Avenue C, Suite 16-F 1125 Airport Road
New York, NY 10009 Coatesville, PA 19320
Att: Mr. Dennis Teng Att: Mr. Barry Olliff
Tattersall Advisory Group
6802 Paragon Place
Richmond, VA 23230
Att: Mr. Jim Mallery
Lazard Asset Management
30 Rockefeller Center
New York, NY 10112
Att: Mr. Kun Deng
Deep Discount Advisors
One West Pack Square
Asheville, NC 28801
Att: Mr. Ron Olin
Opportunity Partners LP
60 Heritage Drive
Pleasantville, NY 10570
Att: Mr. Phil Goldstein
Horowitz & Company Inc.
1555 North Park Drive #102
Weston, FL 33326
Att: Mr. Roy Ward
Croft-Leominster Inc.
207 East Redwood Drive
Baltimore, MD 21202
Att: Mr. Kent Croft
THE CENTRAL EUROPEAN EQUITY FUND, INC.
/s/ Robert R. Gambee
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Robert R. Gambee
Chief Operating Officer and Secretary
May 30, 2002
Dear
Enclosed is a copy of the Institutional Shareholder Services report in
which they comment on the shareholder proposal for CEE. Perhaps you have already
seen it.
The ISS recognizes the proponent really wants an open-ending of the Fund.
In their review, ISS determined that there was no affiliation between the board
and DeAM, the fund's advisor, since the audit and advisory committees are all
comprised of independent directors. CEE's performance has been in line with its
benchmark since inception and its expense ratio is also in line (they even say
many non-US equity CEFs have higher expense ratios.) They cite favorably the
board's repurchase program as tangible evidence of trying to tackle the
discount. But they further say that, in their view, discounts are cyclical and
are based on investor sentiment and public opinion. As investment styles and
geographic regions come in and out of favor, CEF discounts respond accordingly.
They add that the argument that a discount represents a loss in value from NAV
is not necessarily true for most investors who purchased at a discount, and thus
the discount is not the basis from which their investment should be judged. They
conclude there is no direct linkage between the discount, a possible
open-ending, and the advisor. They thus recommend voting against the proposal.
As professional money managers, I hope you share their views. Please call
me with any comments you may have.
Sincerely,
/s/ Robert Gambee
Robert Gambee
Chief Operating Officer
Tel: (212) 454-1695
Fax: (212) 454-1706
[LOGO] ISS
Proxy Analysis:
The Central European Equity Fund, Inc.
Ticker: CEE
Annual Meeting: June 13, 2002
Record Date: May 10, 2002
Security ID: 153436100(CUSIP)
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MEETING AGENDA
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Item Code Proposals Mgt. Rec. ISS REC.
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|_| 1 M0201 Elect Directors For SPLIT*
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|_| 2 M0101 Ratify Auditors For FOR
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|_| 3 S0810 Terminate Advisory Agreement Against AGAINST
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* WITHHOLD votes from Juergen Strube for poor attendance.
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The Central European Equity Fund, Inc. o May 24, 2002 (C)2002, Institutional
Abbott Martin, Analyst Phone: (301) 556-0500 Shareholder Services
INSTITUTIONAL PAGE 2
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BUSINESS: Closed-end investment company
STATE OF INCORPORATION: Maryland
ACCOUNTANTS: PricewaterhouseCoopers LLP
AUDIT FEES: Pursuant to the SEC's revised Auditor Independence Requirements and
revised proxy disclosure rules, the company has reported fees paid to the
auditors in the last fiscal year. These fees are reflected in the table below.
Audit fees: $ 55,000.00
Financial information systems design and $ 0.00
implementation fees:
All other fees: $ 11,733.00
Percentage of total fees attributable to nonaudit work: 17.58%
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The Central European Equity Fund, Inc. o May 24, 2002 (C)2002, Institutional
Abbott Martin, Analyst Phone: (301) 556-0500 Shareholder Services
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BOARD SUMMARY
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Insiders Affiliated Independent
-------- Outsiders Outsiders
---------- -----------
Full Board 3 0 6
Audit Committee 0 0 4
Compensation Committee 0 0 0
Nominating Committee 0 0 3
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Classified Board: Yes CEO as chairman: No
Current Nominees: 3 Retired CEO on board: No
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The Central European Equity Fund, Inc. o May 24, 2002 (C)2002, Institutional
Abbott Martin, Analyst Phone: (301) 556-0500 Shareholder Services
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|_| Item 1: Elect Directors
The Central European Equity Fund, Inc., classifies its nine directors into
three director classes. This proposal seeks election of three directors
for three-year terms expiring in 2005.
The full board consists of three interested persons and six independent
outsiders. The Audit Committee comprises four independent outsiders. The
Nominating Committee comprises three independent outsiders. Juergen
Strube, Robert Wadsworth, Werner Walbrol, Otto Wolff von Amerongen, and
Edward Schmults, independent outside directors, have served on the board
for a period of ten years or more.
Juergen Strube, Otto Wolff von Amerongen, and Detlef Bierbaum do not own
any shares of a fund within the family of investment companies.
Juergen Strube and Richard Burt attended less than 75 percent of board and
committee meetings last year. However, Mr. Burt is a continuing director
who is not up for election at this year's meeting. We were given no
additional information concerning Dr. Strube's poor attendance.
- We support the independent nature of the key board committees, which
include no interested persons.
- In our opinion, directors can best serve shareholder interests by
becoming shareholders themselves.
- We believe high absenteeism warrants withholding votes from directors.
In our opinion, directors who fail to attend meetings are not able to
fulfill their fiduciary obligations or adequately represent shareholder
interests.
- We will be monitoring Mr. Burt's attendance at future board and
committee meetings. We recommend a vote FOR the directors with the
exception of Juergen Strube. We recommend that shareholders WITHHOLD votes
from Juergen Strube for poor attendance.
SPLIT vote on Item 1.
|_| Item 2: Ratify Auditors
The board recommends that PricewaterhouseCoopers LLP be approved as the
company's independent accounting firm for the coming year.
We prefer that companies do not engage their auditor for work unrelated to
the audit function. This safeguards shareholders' interest by avoiding
potential conflicts that might interfere with the auditor's independent
judgment.
Vote FOR Item 2.
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The Central European Equity Fund, Inc. o May 24, 2002 (C)2002, Institutional
Abbott Martin, Analyst Phone: (301) 556-0500 Shareholder Services
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|_| Item 3: Terminate Advisory Agreement
A shareholder proposes that the fund terminate its investment advisory
agreement with Deutsche Asset Management International GmbH (Dami).
Explicit in this proposal is the belief that Dami is responsible for the
prevailing discount and the main impediment to its reduction. The
proponent would like an eventual open-ending of the fund and believes that
the termination of the advisor is the first step. As of May 22, 2002, the
fund was trading at a 13.81-percent discount to net asset value (NAV).
Background
The Central European Equity Fund primarily invests in Central and Eastern
European equities. Its benchmark is the CECE index published by the Vienna
Stock Exchange covering Poland, Hungary, the Czech Republic, and Slovenia.
The fund offers exposure to these markets that have lower P/E's than the
developed markets and less instability than other emerging markets. The
majority of the fund's holdings are in the Polish and Hungarian markets.
The fund believes that as Eastern Europe moves closer to the EU, the
economies will continue their expansion and attract new investment.
The Fund has a Management Agreement with Deutsche Bank Securities, Inc.
(the "Manager"), and an Investment Advisory Agreement with Dami. The
Manager and the Investment Adviser are affiliated companies.
The Management Agreement provides the Manager with a fee, computed weekly
and payable monthly, at the annual rates of 0.65 percent of the fund's
average weekly net asset up to $100 million, and 0.55 percent of such
assets in excess of $100 million.
The investment advisory agreement provides Dami with a fee, computed
weekly and payable monthly, at the annual rates of 0.35 percent of the
fund's average weekly net assets up to $100 million and 0.25 percent of
such assets in excess of $100 million.
When seeking a termination of an advisory agreement, several factors need
be examined. In this case, it seems important to examine the relationship
between the board and Dami. Ultimately, the board has control over the
discount and any possible open-ending and only if one can prove collusion
between the board and advisor would the proposal offer possible relief
from the discount. Of course, it is also useful when judging the advisor
to examine the performance of the fund and the fund expenses relative to
peers. Finally, the root and importance of the discount must also be
examined.
The Board
The proponent seems to believe that fundamentally there are not sufficient
firewalls between the board and the investment advisor to the detriment of
shareholders. The general argument is grounded in the contention that the
board and the advisor are, in essence, the same entity and that in order
to effect change, Dami should be removed. The advisory agreement was last
submitted to a shareholder vote on June 21, 1991.
However, ISS finds no reason to suspect that the board is "affiliated"
with the advisor. As shown above, the board contains six independent
directors and fully independent Audit and Nominating committees. Past
share repurchases also demonstrate that the board may take action that
decrease the advisor's fee if they believe it to be in the interests of
the shareholder.
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The Central European Equity Fund, Inc. o May 24, 2002 (C)2002, Institutional
Abbott Martin, Analyst Phone: (301) 556-0500 Shareholder Services
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Advisor Performance
Over the course of the fund's life (inception: 02/01/1990) the fund has
annualized NAV total returns of 4.06 percent. Over this time, the fund has
performed roughly in line with its relevant index (although the index has
changed several times over the life of the fund). This undermines the
possible argument that fund performance has been significantly below par.
According to Wiesenberger data, the fund's performance over the last ten
year's ranks in the top half of all Non-U.S. Equity Closed-end Funds. The
fund also has a reasonable total expense ratio, currently at 1.66 percent
of the fund's NAV. The expense ratio indicates that the fund and its
advisor are not collecting exceptional fees from fund investors. Many
Non-U.S. equity Closed-end Funds maintain a higher expense ratio.
The Matter of the Discount
Closed-end funds (CEFs) are fundamentally different from the more popular
open-end mutual fund. Unlike a mutual fund, closed-end funds issue a
limited number of shares that are then traded on an exchange. The value of
fund shares may therefore trade at a level different from the value of the
underlying portfolio. The share price can trade at a premium, above the
fund's net asset value (NAV), or at a discount, below the fund's NAV. Most
closed-end funds, particularly country funds, trade at a discount to NAV.
If the fund were to open-end, shares would be exchangeable at their NAV
price. Unfortunately however, such a conversion to open-ending often leads
to a run on fund shares. Investors redeem fund shares as they seek to
profit from the new share price. This may lead to large outflows, which in
turn causes a forced sell-off of securities within the fund's portfolio.
Remaining shareholders are left with a newly open-ended fund with reduced
assets, increased portfolio turnover, capital gains, and a corresponding
increase in expenses/share. The remaining fund, if it remains at all, is
likely a far less attractive investment than the closed-end fund that
originally existed.
The Closed-end Advantage
The advantages of closed-end funds are oft reported. Since the funds do
not have to meet redemptions, closed-end funds do not have to keep cash on
hand, allowing their portfolios to be more fully invested. Similarly, CEFs
do not have to sell out of positions at inopportune moments and may invest
for the longer-term, more fully meeting their investment objective. This
last fact helps CEFs hold down portfolio turnover and related expense as
well as making CEFs outstanding vehicles for investment in less liquid
markets. Further, there is no need for 12b-1 fees as the fund does not
have to match outflows with new fund sales. These factors help CEFs
maintain generally lower expenses than their open-end brethren.
CEFs also allow investors to place orders throughout the business day, as
opposed to mutual funds where all orders are placed at the close of
business. Investors might also benefit from the CEFs use of leverage
through the issuance of senior securities. However, leverage comes with
increased risk.
Drawbacks
Of course, CEFs are not without their drawbacks. Many of these funds are
thinly traded, making it difficult for a large investor to "get out"
without radically altering the share price. In fact, low liquidity is
often a reason cited by dissidents and shareholders for open-ending and
tender offer proposals. Of course, a
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The Central European Equity Fund, Inc. o May 24, 2002 (C)2002, Institutional
Abbott Martin, Analyst Phone: (301) 556-0500 Shareholder Services
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persistent discount is still the number one complaint of investors in
CEFs. In this case, it is the discount that is the cause for concern.
Discounts
The majority of closed-end funds trade at a discount; causing some
investors to feel they are "missing" value in their investment. ISS
however, does not view the discount as such a large problem so long as it
is not persistent and a reasonable expectation exists for its eventual
narrowing. ISS views discounts as cyclical, based on the vagaries of
investor sentiment and popular opinion. As investment styles and
geographic regions come in and out of favor, CEF discounts usually respond
accordingly. So, while the fund does have a relatively high discount,
though not completely out of line with its peers, it is not likely to be a
permanent condition.
Discounts may also provide opportunity for the savvy investor. Buying a
fund when it trades at a discount may help the investor achieve higher
yields on their investment and the narrowing of a discount may increase
the capital gains a shareholder might earn over a given holding period.
Finally, it is worth noting that when dissident shareholders describe the
discount, it is always described as a loss in value from NAV. However, it
is highly unlikely that all investors, including the proponent, actually
purchased all shares at NAV. Many investors would have purchased shares at
a discount, meaning NAV is not the basis from which their investment
should be judged.
Conclusion:
While ISS understands it may be difficult for a shareholder to effect
change, and that the advisor may be one of the few areas where a tangible
influence can be felt, there is really no direct linkage between the
discount, a possible open-ending, and the advisor. Further, while the
Investment Company Act of 1940 very clearly delineates the relationship
between the board and the advisor, there is insufficient evidence to
support the proponent's implicit belief that the entire organization is a
"club" and that Dami is an impediment to a possible open-ending. It is
therefore difficult to justify the disruption in the investment program
that a termination of the advisory agreement would portend. There also
seems little reason to terminate the advisory agreement on the grounds of
performance or expense. Finally, even the eventual goal of narrowing the
discount, while well intentioned, may not be important for the long-term
health of the fund.
Vote AGAINST Item 3.
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The Central European Equity Fund, Inc.
31 West 52nd Street
New York NY 10019
(212) 474-7000
Shareholder Proposal Deadline: January 14, 2003
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The Central European Equity Fund, Inc. o May 24, 2002 (C)2002, Institutional
Abbott Martin, Analyst Phone: (301) 556-0500 Shareholder Services
INSTITUTIONAL PAGE 8
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Solicitor: Morrow & Co.
This vote recommendation has not been submitted to, nor received approval
from, the Securities and Exchange Commission. While ISS exercised due care
in compiling this analysis, we make no warranty, express or implied,
regarding the accuracy, completeness, or usefulness of this information
and assume no liability with respect to the consequences of relying on
this information for investment or other purposes.
Copyright 2002, Institutional Shareholder Services, Inc. All Rights
Reserved. The information contained in this ISS Proxy Analysis may not be
republished, broadcast, or redistributed without the prior written consent
of Institutional Shareholder Services, Inc.
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The Central European Equity Fund, Inc. o May 24, 2002 (C)2002, Institutional
Abbott Martin, Analyst Phone: (301) 556-0500 Shareholder Services
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Vote Record Form:
The Central European Equity Fund, Inc.
Ticker: CEE
Annual Meeting: June 13, 2002 Record Date: May 10, 2002
Account ID Code: Shares Held on Record Date:
Shares Voted: Date Voted:
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MEETING AGENDA
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Item Code Proposals Mgt. Rec. ISS REC. Vote Cast
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|_| 1 M0201 Elect Directors For SPLIT
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|_| 2 M0101 Ratify Auditors For FOR
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|_| 3 S0810 Terminate Advisory Against AGAINST
Agreement
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The Central European Equity Fund, Inc. o May 24, 2002 (C)2002, Institutional
Abbott Martin, Analyst Phone: (301) 556-0500 Shareholder Services