Pricing
When buying or selling either an open-end or closed-end fund, an investor usually knows the current value of the fund’s assets per share (NAV).
For example, to buy an open-end fund with a NAV of $15, an investor pays $15 per share. The fund simply issues new shares to the investor at the current NAV. The assets the fund manages have increased, but the value per share remains the same because the new shares have exactly the same value as the other shares. If the investor sells, he or she is paid the NAV. The amount of assets the fund manages has been reduced, but the NAV of outstanding shares has not changed because the shares redeemed were equal in value to all others.
With closed-end funds, the shares are traded in the open market and are consequently subject to demand/supply imbalances. They may trade at a price greater than their NAV (termed a premium) or at a price below the NAV (termed a discount). Read the rest of this entry »
All freely traded liquid markets share common traits related to psychological pressures (fear and greed), but each differs as to fundamental relationships, trading mechanisms, and structural factors. Each market’s individual characteristics must be understood. Once this understanding has been achieved, proper evaluation of similarities or differences, as well as interrelated pricing effects, with other markets can be accomplished.
One market that allows easy application of Drach’s common stock analysis is closed-end funds, also known as publicly traded funds or closed-end investment trusts (CEITs).
Although one of the oldest forms of investment, closed-end funds are among the most misunderstood and consequently often overlooked investment areas. Their origin can be traced back to the establishment of a Belgian fund in 1822; thereafter they flourished, particularly among English and Scottish investors in the latter 1800s. The first U.S. fund was formed in 1893 and, until the time of the stock market crash of 1929, closed-end funds were the dominant form of publically owned investment companies. Read the rest of this entry »
Management’s income is usually based on a percentage of the market value of the securities in the fund. The larger the asset base is, the greater the income. Both open- and closed-end fund managers are (at least theoretically) compensated to provide superior investment performance. If the value of the assets being managed grows, the management fees expand proportionately. In addition to pressures associated with performance, the open-end fund manager is faced with problems that can arise form variable capitalization.
Statistically, there is virtually no question that the popularity of both closed-end and open-end funds varies with market conditions. When the market is high, especially during periods of excessive speculation, open- end mutual fund sales increase (sometimes very dramatically), and there is an increase in the number of new closed-end funds. When the market is depressed, open-end sales decline (sometimes redemptions dominate), and there are few new closed-end funds formed. Read the rest of this entry »
Since almost all closed-end funds tend to sell at a discount, it can appear obvious that there is no reason to purchase closed-end funds when they are selling at a premium. Sometimes a special feature, for example, a closed-end fund having a private placement in its portfolio which is about to go public as a hot issue, may justify purchase at a premium. Otherwise, it is difficult to make a case for paying a price higher than NAV.
Central to the advantages of closed-end funds is the discount; both as to dividends and as to pricing variances. Read the rest of this entry »
