In the published common stock portfolio modeling the Continuous Full Investment portfolio models were included to function as a control to allow objective comparisons with the market timing models.

Although intended as a control, allowing demonstration of the validity of the timing technique, the Continuous Models have significantly outperformed the broadly based popularized market averages. The reasons for this superior performance are twofold. First, the rigid requirements for stocks to qualify for the Master List results in the stocks comprising the Continuous Models to be of usually superior fundamental quality, thereby giving the group an upward bias relative to the overall market. Second, the Continuous Models change positions in a gradual, relatively slow process in which new positions are selected that are among the most discounted (low-priced relative to the others) on the list. In effect, a rotational process adds those that have become more discounted and deletes those less discounted.

FundsIn applying this concept to closed-end funds, the search for relative discounting is the same. Purchases are confined to the issues demonstrating the largest current discount relative to historical norms and selling those whose discount has lessened.

There is a very significant difference between the published Continuous modeling that is confined to stocks on the Master List and the basic modeling when applied to closed-end funds. The stock modeling, by definition, is confined to stocks. The wide variety of different types of closed-end funds allows many more choices when searching for those specific funds demonstrating the most potentially advantageous discounts.

For example, four single-country funds invest primarily in German companies. In January 1991, you could have sold The Germany Fund at an 18-percent premium to net asset value and in the same month moved into The New Germany Fund, then trading at a 20-percent discount. A month later New Germany Fund was trading at its net asset value, while The Future Germany Fund was an obvious switch at a 17-percent discount. The Future Germany Fund’s discount narrowed to the 1-percent range by October, although The Emerging Germany Fund’s discount still stood at 10 percent from net asset value. Just a month later, The Emerging Germany Fund’s discount had narrowed to 3 percent, while The New Germany Fund’s discount had widened to 20 percent.

The convertible funds also provide a good example of this technique. TCW Convertible Fund was trading at a 10-percent discount at $81/2 in February 1991. At the same time, Castle Convertible Fund was trading at a 15-percent discount at 163/4. By March of that year, Castle Convertible Fund’s share price had gained 14 percent to $19 per share, moving it to about a 10-percent discount, while TCW Convertible Fund had moved to an 8-percent discount, its share price declining 12 percent to $71/8—an 8-percent discount to net asset value. If you had been a buyer of TCW Convertible Fund at that time and sold it six months later, when it was trading at a 13-percent premium at 874 you would have pocketed a 24-percent gain plus six months’ worth of dividends. When you sold, you could have switched into another convertible fund, Lincoln National Convertible Fund, then at a 15-percent discount at a share price of 143/4, which over the next two months increased in price by 8 percent to 151/2. Thus, it is possible to continually rotate within the same group of funds, buying the one(s) with the widest discount(s).

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