Showing posts with label closed ended funds. Show all posts
Showing posts with label closed ended funds. Show all posts

Thursday 16 January 2020

Mutual Funds

Mutual funds are, in theory, an attractive alternative for the individual investor, combining

  • professional management, 
  • low transaction costs, 
  • immediate liquidity, and 
  • reasonable diversification. 
In practice, they mostly do a mediocre job of managing money. There are, however, a few exceptions to this rule. 

For one thing, investors should certainly prefer no-load over load funds; the latter charge a sizable up-front fee, which is used to pay commissions to salespeople. Unlike closed-end funds, which have a fixed number of shares that fluctuate in price according to supply and demand, open-end funds issue new shares and redeem shares in response to investor interest. The share price of open-end funds is always equal to net asset value, which is based on the current market prices of the underlying holdings. Because of the redemption feature that ensures both liquidity and the ability to realize current net asset value, open-end funds are generally more attractive for investors than closed-end funds.' 

Unfortunately for their shareholders, because open-end mutual funds attract and lose assets in accordance with recent results, many fund managers are participants in the short-term relative-performance derby. Like other institutional investors, mutual fund organizations profit from management fees charged as a percentage of the assets under management; their fees are not based directly on results. Consequently, the fear of asset outflows resulting from poor relative performance generates considerable pressure to go along with the investment crowd. 

Another problem is that open-end mutual funds have in recent years attracted (and even encouraged) "hot" money from speculators looking to earn quick profits without the risk or bother of direct stock ownership. Many highly specialized mutual funds (e.g., biotechnology, environmental, Third World) have been established in order to exploit investors' interests in the latest market fad. Mutual-fund-marketing organizations have gone out of their way to encourage and even incite investor enthusiasm, setting up retail mutual fund stores, providing hourly fund pricing, and authorizing switching among their funds by telephone. They do not discourage the mutual fund newsletters and switching services that have sprouted up to accommodate the "needs" of hot-money investors.

Some open-end mutual funds do have a long-term value investment orientation. These funds have a large base of loyal, long-term-oriented shareholders, which reduces the risk of substantial redemptions that could precipitate the forced liquidation of undervalued positions into a depressed market. The Mutual Series Funds and the Sequoia Fund, Inc., are among some favorites; the Sequoia Fund, Inc., has been completely closed to new investors in recent years, while some of the Mutual Series Funds periodically open to accommodate new investors.

Thursday 21 June 2018

How to measure investor sentiment and how you can profit from this?

Closed-end funds

Individual investors are the primary owners of these funds as opposed to institutions.

Institutions such as mutual funds don't buy shares of closed-end funds or other mutual funds because their customers don't like the idea of paying two sets of fees,.

We can postulate that individual investors would be more flighty than professional investors, such as pension funds and endowments, and thus, they would be subject to shifting moods of optimism or pessimism ("investor sentiment").

When individual investors are feeling perky, discount on closed-end funds shrink and when they get depressed or scared, the discounts get bigger.


Small companies

Individual investors are also more likely than institutional investors to own shares of small companies.

Institutions shy away from the shares of small companies because these shares do not trade enough to provide liquidity a big investor needs.



How to measure individual investor sentiment?

So, if the investor sentiment of individuals varies,  it would show up both in the discounts on closed-end funds and on the relative performance of small companies versus big companies.

That is exactly what was found.  The average discount on closed-end funds was correlated with the difference in returns between small and large company stocks; the greater the discount, the larger the difference in returns between those two types of stocks.



How to profit from this investor sentiment variability?

The strategy of buying the closed-end funds with the biggest discounts earned superior returns (a strategy also advocated by Benjamin Graham).  Burton Malkiel, author of A Random Walk Down Wall Street, has also advocated such a strategy.



Friday 28 April 2017

Closed-End Investment Fund Discounts

Several studies have shown that closed-end funds tend to trade at a discount (sometimes exceeding 50%) to their per share NAVs.

Theoretically, investors could purchase all the shares in the fund, liquidate the fund, and make a profit by selling the constituent securities at their market prices.

However, after accounting for management fees, unrealized capital gain taxes, liquidity and transactions costs, any profit potential is eliminated.

Thursday 3 April 2014

Asset Management Accounting 101 (A Conceptual Overview)

The single biggest metric to watch for any company in this industry is assets under management (AUM), the sum of all the money that customers have entrusted to the firm.

An asset manager derives its revenue as a percentage of assets under management, AUM is a good indication of how well -or how badly - a firm is doing.

Unlike a bank or insurer, where big losses can cause the firm to become insolvent, big losses in asset management portfolios are borne by customers.

Big losses will affect fee income by reducing AUM, but an asset manager could lose well over half the value of its assets under management and still remain in business.

In a worst-case scenario, customers could withdraw their remaining dollars and the firm could fold if its fee income became inadequate to support its operations.

But because asset management requires almost no capital investment, these companies can pare back to the bone to remain in business.



Additional notes:
Asset management firms run money for their customers and demand a small chunk of the assets as a fee in return.

This is lucrative work and requires very little capital investment.

The real assets of the firm are its investment managers, so typically compensation is the firm's main expense.

Even better, it doesn't take twice as many people to run twice as much money so economies of scale are excellent.

This means that increases in assets under management - and therefore, in advisory fees - will drop almost completely to the bottom line.

All this adds up to stellar operating margins, which are usually in the 30% to 40% range - something you won't see in many industries.


Tuesday 6 November 2012

iCAP the Undervalued Closed-End Fund. What will be its outcome?


Here is an article to understand the events happening in iCAP at present.  Closed-end fund often trades at a discount inviting predators that are after short-term quick gains, rather than long-term bigger gains.



Canny Money Manager Spots Prey: the Undervalued Closed-End Fund

July 09, 1988|DAVID A. VISE | The Washington Post
ANNAPOLIS, Md. — It seems an odd place to plot the next wave of hostile takeovers.
But there in his airy Annapolis living room overlooking the calm waters of Crab Creek, Bob Gordon speaks of financial war. His prey: the investment companies known as closed-end mutual funds whose undervalued shares offer opportunities for short-term trading profits.
Gordon, a 35-year-old money manager who splits his time between Annapolis and Manhattan, is remarkably candid about potential takeover targets. "Scudder New Asia Fund is an obvious one to go after," Gordon said. "Scudder gave in on one before."
Identifying profit-making opportunities with relatively low risk is Gordon's specialty--and he pursues it day and night. With his fiancee sleeping nearby, Gordon regularly studies the tax code and other documents until 2 a.m., dreaming up new ways for clients of his New York-based Twenty-First Securities Corp. to boost after-tax returns.
"I see little glitches," he said. "When I was 12, I knew I wanted to do this. I like math, and this is a practical application of math. It is fun for me."
Gordon believes that he has identified a glitch in closed-end funds that makes them vulnerable to a hostile raid.
Unlike the more common open-end funds, a closed-end fund sells a fixed number of shares to the public and invests the proceeds in stocks and bonds.
Price Reflects Value
In open-end funds, investors buy their stake from the fund and sell it back whenever they wish. There is no limit on the number of shares, and the price reflects the exact value (net asset value) of the stocks, bonds or cash held by the fund at the time of a transaction.
Closed-end funds are more like industrial firms whose shares trade on stock exchanges--the price for a fund's shares is primarily determined by the demand for the fixed number of shares. Investors consider the underlying market value of a fund's holdings, but share prices for the funds are also influenced by expectations, emotions and other factors that often affect prices in the stock market.
Many of the closed-end funds are vulnerable to a takeover maneuver these days because the shares of these funds are trading at discounts of 20% or more below the market value of their holdings. The Securities and Exchange Commission recently launched a study to determine why these discounts exist.
To their horror, uninformed investors often find that shares in new closed-end funds quickly drop below their initial offering price and may continue to remain significantly below the market value of the fund's holdings.
There are several reasons.
First, the initial price includes substantial underwriting fees paid to the brokerage firms that market the shares.
Second, while these brokerages may support the price through active trading in the days immediately following the offering, the firms typically retreat soon after and use their capital elsewhere. Once the firms are no longer supporting the price of a closed-end fund, it typically drops.
High Management Fees
Another common factor affecting prices of closed-end funds are high management fees, which reduce returns, said Thomas J. Herzfeld, a Florida-based closed-end fund expert who is working with Gordon on possible plans to restructure closed-end funds.
What Gordon has in mind is the forced conversion of publicly traded closed-end funds to open-end mutual funds, or, in extreme cases, the forced liquidation of closed-end funds.
Gordon speaks of buying shares in a closed-end fund, presenting a restructuring proposal to fund managers and then giving the managers a severe "this is your one chance to save your jobs" warning. "Some of the guys are waiting for it to happen to them," Gordon said.
Although these strategies are not risk-free, they could produce stock trading profits for Gordon and other closed-end fund investors.
The conversion of an undervalued closed-end fund to the open-end variety creates the profits, according to Gordon's strategy. By definition, an open-end mutual fund trades at a price that reflects the market value of its holdings. So the price of an undervalued closed-end fund will rise if the fund is converted to an open-end fund.
Closed-end fund managers may oppose conversion for several reasons. First, they receive a management fee that is a percentage of total fund assets. After a fund is converted to open-end and the price rises, Herzfeld said, many fund investors typically sell, shrinking assets under management and management fees by one-third.
Fund managers may also oppose conversion because of a belief that an open-end structure--which requires them to redeem investor shares on demand in cash--will hurt the fund in the long run.
Criticism of Tactic
Nick Bratt, president of the Scudder New Asia Fund--mentioned as a possible target by Gordon--said that an open-end structure could hurt the fund in the long run by forcing it to raise cash by dumping stocks of small, growing companies at inopportune moments.



Tuesday November 6, 2012

Hostile takeover of iCapital.biz?

By RISEN JAYASEELAN
risen@thestar.com.my


PETALING JAYA: Closed-end fund iCapital.biz Bhd, managed by seasoned fund manager Tan Teng Boo, has become the target of opportunistic investors who may embark on a hostile takeover of the company, insiders close to the matter confirmed.
European hedge fund Laxey Partners has accumulated close to 10 million shares in iCapital.biz, representing just under a 6.9% stake. Laxey has a track record of targeting listed funds that trade below their net asset values (NAVs).
It is fairly common for institutional funds that have bought stocks of closed-end funds trading at a sharp discount to their NAVs to vote for their liquidation.
A request has been put forward to iCapital.biz to have one Andrew Pegge made a director of the company, along with two others Lo Kok Kee and Low Nyap Heng. Shareholders will vote on this at iCapital.biz's coming AGM this Saturday. As such, the AGM is being touted as a must attend for all shareholders who will no doubt be presented with arguments from both sides, namely the current management of iCapital.biz, headed by Tan and from parties associated with Laxey.
Pegge is the founder and a director of Laxey and has been embroiled in bitter shareholder disputes in the past. He has been described as a shareholder activist and manages funds that look to take advantage of “discount volatility” in investment trusts.
Together with Lo, they had embarked on a very similar move in Singapore last year, taking a position in SGX-listed closed-end fund United International Securities (UIS) and seeking board representation on the basis of championing a narrowing of the gap between the market price of UIS with that of its NAV. Laxey and Lo have also embarked on similar efforts in Malaysia in the past with Amanah Millenia Fund and Amanah Harta Tanah PNB2, respectively.
Another substantial shareholder has also emerged in iCapital.biz, in the form of London Investment Management Co Ltd, with a 6.5% stake. It isn't clear if this fund is in cohort with Laxey but they are both the largest shareholders in iCapital.biz, collectively owning at least 18.7 million shares (or 13.4%) out of the total 140 million iCapital.biz shares.
Although far from having a simple majority of iCapital.biz shares, this combined stake does wield some power considering that the remaining shareholders of iCapital.biz seem to be spread out.
According to iCapital.biz 2012 annual report, it has more than 3,000 shareholders. But about 65.8% of its shares are held by about 2,000 minorities who hold between 100-10,000 shares. Tan's Capital Dynamic Assets Management Sdn Bhd, which manages the closed end fund, has only 689,000 shares or a 0.49% stake.
Sources close to iCapital.biz said that Tan was very concerned about the moves to have new members on board and will consider stepping down if shareholders were to give in to the request.
In what is seen as a defensive mode, iCapital.biz has put up two individuals to be elected to the board, namely Datuk Tan Ang Meng, the former CEO of Fraser & Neave Holdings Bhd and Dr Yin Thing Pee, a medical specialist.
iCapital.biz shares have seen some active trading this week and hit a 52-week intra-day high of RM2.56 yesterday and then closing at RM2.49, up almost 9% from early last week.
iCapital.biz has had a decent performance since its listing in October 2005, with its NAV rising from 99 sen then to RM2.95 as at Oct 24. The performance of its share price has also outpaced the FBM KLCI. However, its stock has traded below its NAV, a gap which earlier this month stood at about 30%. The gap has since narrowed to around 19%.
iCapital.biz's ethos is to allow long-term shareholders to benefit from value investing and is helmed by the respected Tan, who is a sought-after commentator of economic and corporate affairs. Laxey though is likely to put forward a simple and pragmatic suggestion to iCapital.biz shareholders: liquidate your company and cash in at its NAV (or close to it).



Using closed-ended funds


Closed-ended funds can be used
  • to build out a portfolio or
  • add specific components like international exposure.

Patient value investors seek not only a good price (meaning a good discount), but also a fund with solid long-term potential.

Many pros use closed-ended funds, including Warren Buffett.
  • In 1972, Source Capital was trading at nearly a 50% discount to NAV. Buffett purchased almost 20% of the outstanding shares.
  • Though the price fluctuated in the interim, Buffett hung in for 5 years before selling for an estimated $15.7 million profit.

Thursday 25 October 2012

Benjamin Graham: Mutual Funds


Graham, Chapter 9:
Mutual funds are the subject of the ninth chapter of The Intelligent Investor. Fund performance and the different types of funds available to the investor are covered. 
One of those types of funds is the performance fund, which seeks to outperform the Dow Jones Industrial Average in this case, so they are the more aggressive of the funds. 
Another type, the closed-end fund only offers a specific number of shares at one time, instead of continuously, and is the most illiquid of the bunch. 
The last mutual fund type Graham mentions in this chapter is the balanced fund. These types of funds contain a certain percentage of bond holdings. Even the conservatively investing Graham suggests you would be better off investing in bonds by themselves, rather than mixed in a fund with stocks.


The Intelligent Investor by Benjamin Graham

Tuesday 25 September 2012

iCap Closed End Fund



iCap Period (Yrs) 6
May-06 May-12 Change CAGR
millions millions
Equity 138.64 400 188.34% 19.30%
LT Assets 78.13 262.658 236.18% 22.39%
C. Assets 61.49 137.364 123.39% 14.33%
LT Liabilities 0 0 #DIV/0! #DIV/0!
C. Liabilities 0.97 0.263 -72.89% -19.55%
Sales 1.02 4.586 349.61% 28.47%
Earnings -1.22 1.709 -240.08% #NUM!
Interest exp. 0 0 #DIV/0! #DIV/0!
Market cap 138.6 315 127.27% 14.66%
D/E ratio 0 0 #DIV/0!
ROE -0.88% 0.43% -148.58%
P/E -113.61 184.32
P/BV 1.00 0.79
Dividends
DPO ratio 0.00%
DY range 0














Closed-ended funds: Why a discount, anyway?

Most closed-ended funds sell at a discount.

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 reasonthe 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.

Tuesday 11 May 2010

A few investing rules that will help you avoid financial frauds

"Those who cannot remember the past are condemned to repeat it."  
American philosopher George Santayana

To save you from financial ruin, here are a few investing rules that will help you avoid financial frauds:

1.  Do not invest in arcane schemes with promoters who will not explain the investments clearly.  Make sure you understand exactly where the investment costs and returns will come from and at what risk.

2.  Beware the "quick buck" or getting "something for nothing."  Promises of "too good to be true" returns are just that.

3.  Always do reference checking before investing.  Charlatans spend much time, money and effort in trying to appear legitimate.  Beware.  Do not be fooled.

Unfortunately, just following these three rules doesn't guarantee you will never be fleeced.  So do not 'put all your eggs in one basket.'  That way, even if you are duped, not everything is lost.  Diversify your investments.

Saturday 1 May 2010

Now, Mr Tan Teng Boo has so many things to sell you other than his newsletter.


Tan Teng BooA few years ago, Tan Teng Boo had only one thing to sell you, his newsletter.
Later he launched his first public fund known as theiCapital.biz Berhad (ICAP) listed in KLSE which I did a long review long long time ago. [iCAP review]
But last few years, he subsequently launched 2 other funds to sell to you, namely the iCapital Global Fund and theiCapital International Value Fund.
Due the the iCapital Global Fund big minimum investment requirement (USD200k!), many are kept out of the boat and so he launched his “International” fund in Australia later that requires only AUD20,000 minimum, so more people can join the “global investing” boat.
Now, Mr Tan has so many things to sell you other than his newsletter.
Some of these stuffs are good stuffs to buy, some are …


Quote: 'Profit from the information and inefficiencies of the market'

Thursday 4 March 2010

icapital.biz is 'unpopular' and 'unloved' during this bull run!





29.7.2009:  NAV per share of icapital.biz was RM1.87; icapital.biz share price was around RM1.80.


3.3.2010:  NAV per share of icapital.biz was RM2.08; icapital.biz share price closed at RM1.72.  This price was a 17.3% discount to its NAV.

.  
Also read: Closed-ended funds: Why a discount, anyway?

Friday 16 October 2009

Is it surprising that iCap is trading at a discount?

During the last bull market, iCap traded at a high of $2.82.  There are many investors in the market with realised losses or who are still holding iCap shares at higher costs to its present price.

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.

Saturday 1 August 2009

Using closed-ended funds

iCap closed ended fund is structured for those investors who are seeking maximum portfolio gain and who are not interested in income. The dividends and the realised capital gains in iCap are reinvested to achieve the objective of maximising capital or portfolio gain. It is not hard to see that iCap closed ended funds should be considered a long-term investment.

Should iCap be trading at a premium? It is presently trading at a discount. Well, let not the manager of the fund pleads on this, let the investors decide. The manager should stay focus on just improving the quality of the fund's portfolio and returns.

If the economy does improve, the market is still very cheap at the present level.

Here are some articles of related interests:
Kinds of closed-ended funds
Closed-ended funds: 2 ways to make and 2 ways to lose money
Closed-ended funds: Why a discount, anyway?
Using closed-ended funds

Saturday 4 July 2009

Kinds of closed-ended funds

There are many types of closed-ended funds.

The Wall Street Journal lists closed-ended funds under 14 different headings.

Most closed-ended funds are in fixed income categories like bonds and municipal bonds.

For value investors, the so-called "specialized equity" and "general equity" funds offer the most interesting opportunities.

Country funds, under the category "world-equity funds," also can be good vehicles to introduce international diversification into a portfolio.

Within closed-ended equity funds, value-oriented funds invest in defined categories like real estate or natural resources.

A few strategy funds, like the Madison Claymore Covered Call Fund, employ covered call option writing strategies to extract income from equity positions, and pay more than 10% in annual returns. These may also be worth a look.


Ref: Value Investing for Dummies
Build wealth through smart, steady investing.

Closed-ended funds: 2 ways to make and 2 ways to lose money

The price of a closed-ended fund is tied to the market value of the underlying securities. But it doesn't match NAV exactly. There is no process to peg the price to the NAV daily.

Instead, the price is set by the market, based on supply and demand for the shares of the fund. In a sense, a closed-ended fund is a set of securities within a security - a basket of fluctuating stocks trading inside a traded stock shell.

Closed-ended funds provide investors with two ways to make and two ways to lose money:
  • The underlying value fo the securities portfolio changes.
  • The market's assessment of the value of the portfolio changes, which usually creates a discount or premium to portfolio value in the price of closed-ended fund shares.

Closed-ended funds: Why a discount, anyway?

Most closed-ended funds sell at a discount.

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.

Using closed-ended funds

Closed-ended funds have advantages and disadvantages.

Closed-ended fund investors can expect diversification and professional management (although some question the quality of this management, since many of these managers aren't in the limelight.)

There are management fees, usually 1 to 2%, extracted from portfolio returns.

Liquidity (relative lack of interest and trading activity) can be a double-edged sword:
  • If you're selling, you may not get as good a price, but
  • if you're buying, you'll likely get a discount.
It is not hard to see that these funds should be considered long-term investments.


Closed-ended funds can be used
  • to build out a portfolio or
  • add specific components like international exposure.

Patient value investors seek not only a good price (meaning a good discount), but also a fund with solid long-term potential.

Many pros use closed-ended funds, including Warren Buffett.
  • In 1972, Source Capital was trading at nearly a 50% discount to NAV. Buffett purchased almost 20% of the outstanding shares.
  • Though the price fluctuated in the interim, Buffett hung in for 5 years before selling for an estimated $15.7 million profit.