A recent sampling showed that more than 2/3rds of equity funds trade at a discount, and more than 90% of international equity funds trade at a discount. Many discounts are modest (5 to 10%), but many are 30% or more.
There is much research and speculation about why discounts happen. The debate isn't nearly as important as understanding a few of the most common reasons.
When selecting a closed-ended fund, investors must determine the reason the fund is trading at a discount and whether the discount is significant enought to be attractive. A discount may be justified by
- uncertainty,
- popularity or perceptions of the fund, and
- the underlying asset base.
All 3 factors can work to cause a fund based on securities in Russia or Turkey, for example, to sell at a discount.
Likewise, during the heyday of the Asian Tigers, many funds based in Asia sold at a premium. The reason? Popularity and the perception of future growth and gains.
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