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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Terry Maloney who wrote (84511)	10/23/2000 1:28:06 AM
From: Michael Bakunin	Read Replies (1) \| Respond to of 132070

In order to hold securities with an often-fat fee attached, the market demands an offsetting discount. Income funds have lower discounts. Income gets paid at NAV, which bonus somewhat offsets the management fee. Overlay greed and fear, and something of a premium for hard-to-invest sectors or countries, and you've gone a long way to making sense of CEF's discounts. The real question, IMO, is why anyone buys into them at NAV in the first place. -mb

To: Terry Maloney who wrote (84511)	10/23/2000 11:33:12 AM
From: Knighty Tin	Read Replies (2) \| Respond to of 132070

Terry, that is what I suspected, but it could have been some other stuff. O.K., here are a few reasons why CEFs sell at discounts or premiums (there are probably others I will think of later): 1. They are originally offered at net asset value plus a chunk for offering expenses. Though these expenses are covered in the prospectus, realistically, the buyers don't read it. They typically run over 7%. So, the gullible buyer is down 7% on his purchase price, at least as far as NAV is concerned, the first day the fund trades. Many are dumbfounded by this fact and often cut their "losses" at any price. 2. When a new fund IPO is offered, the major brokerage houses call everyone they think may be interested. They do a good job that way. In effect, most of those who want a piece of this particular pie are in when the deal is done. If somebody has to sell, he usually has to sell to a vulture who is interested, but only at a bargain. Me, for example. <g> Or the brokerage trader. 3. Most CEFs tend to be narrowly focused. There are very few general funds and the great majority of them are over 30 years old. You have country funds, geograhical area funds, state muni funds, industry funds, and leveraged junk funds. When these areas are hot, there is often little alternative for the fund buyer. That is why, in the early 1990s, we saw The China Fund at a premium of 100% (what were these buyers thinking?). Then, when investor interest in that area grows cold, as all areas do eventually, the CEFs often deflate to discounts. 4. CEFs are pretty much set in their asset size, so fund mgt. cos. tend to max out their mgt. fees right after the offering. If they have a good fund manager, they can use him more profitably, for the firm, not the client, on an open end fund, where his performance will bring in more assets over time. Let some flunky butt who can't draw flies to honey run the CEF and its fixed cash payment. The CEFs are often the "farm team" of the fund cos. 5. Because of the fixed size, most CEFs are small relative to open end funds. That means relatively higher fees and expenses on a per share basis. For example, when I was running a $10 billion open end fund, our total expenses were .37% a year. The closed end convertible fund I had previously managed, with $90 million in assets, had expenses over 1%. That is a big difference and over time, hurts CEF results. Investors naturally react by paying less to get in. 6. Nobody sells existing CEFs. Talk to any full service broker and he will: a. have little of no knowledge of CEFs. b. try to steer you away from a closed end fund selling at a 20% discount where he get a 1% one-time commission, into an open end fund selling at net asset value plus his up front commission of 5% and .25% a year in annuities as long as you are suckered in. This lack of "sponsoring sales organizations" makes CEFs an illiquid market. Also, call a fund co. that offers both CEFs and open end funds. They will always push the open end fund. Sometimes, you have trouble even getting an annual report on the CEF. 7. Investors are ignorant and tend to be led to investments by either "advisors" or the media. Almost nobody recommends CEFs, so many investors are surprised to find that such an animal exists. So, those are the reasons. All in all, it means that most CEFs will be relatively undervalued most of the time. Which spells opportunity, in my book.