As expected, Deutsche Asset Management (DeAM) and the $93 million SMALLCap Fund will soon be parting ways. DeAm and officials from the closed-end fund both said that the decision to end their 16-year-long relationship at the end of the current one-year contract was a mutual one. However, the departure of DeAM was not unexpected.

In July, shareholders of the closed-end fund voted in a new board headed by Ralph Bradshaw, president of Cornerstone Advisors. He also controls seats held by Ed Meese (the former Attorney General in the Reagan Administration) and Tom Lenagh. Yesterday, the fund also named board member William A. Clark as its new president.

Bradshaw's election came on the heals of a bitter proxy fight during which he had accused the previous directors, including a director from DeAM, of running the fund for their own interests rather than those of shareholders. The fund fought back by attempting to change the rules governing the election of directors and by authorizing the fund to purchase up to 65 percent of the outstanding shares at 99 percent of NAV. The fund has long traded at a discount to NAV of more than 10 percent.

On July 8, the new board said it was temporarily delaying the start of the tender offer to "finalize the terms of the tender offer and to obtain the input of new board members and recently appointed fund counsel." It added that it still intended to move forward with the tender at some point.

On July 28, the Bradshaw-led board again reaffirmed its commitment to make the tender "at the earliest practical date" and also said it would make monthly distributions of $0.125 per share in a bid to close the discount to NAV at which the fund continues to trade. At that time the board also announced the appointment of Ronald G. Olin and William A. Clark as additional directors.

The contentious history between Bradshaw and DeAM made it a foregone conclusion that the fund advisor would not survive the changes. And, it does not appear that DeAM would have wanted to remain on board anyway.

"At a time when the Fund is embarking on new strategies, our decision not to seek additional renewals of the recently approved investment management contract will allow our Small Cap portfolio team to focus on its other mutual fund and institutional strategies, its existing clients, and the new responsibilities it has accepted over the past 12 months," said Daniel O. Hirsch, co-general counsel for Deutsche Asset Management - Americas in a statement.

Bradshaw said that the fund has already started the search for a new investment manager and that it is seeking an advisor "with demonstrated outstanding performance in the small cap sector."

The lead candidate to win the mandate is most likely Bradshaw's own Cornerstone Advisors. The asset management firm has landed advisory contracts with at least three other closed-end funds -- the EIS Fund, the Progressive Return Fund and the Cornerstone Strategic Return Fund -- that have fallen under the control of Bradshaw. The contract could generate as much as $1.4 million in annual fees, assuming that the assets in the fund are not reduced through the tender offer.

Meanwhile, the board also said that it has awarded an administrative contract to Bear Stearns Fund Management. That contract will become effective on September 1, 2003 and Bear Stearns will assume its duties as soon as practicable after September 30.  

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