Closed-End Funds

Re: Closed-End Funds

Postby kennynah » Sat Jul 05, 2008 10:47 am

Closed-end fund shares trade continually at whatever price the market will support. They also qualify for advanced types of orders such as limit orders and stop orders.

This is in contrast to open-end funds which are only available for buying and selling at the close of business each day, at the calculated NAV, and for which orders must be placed in advance, before the NAV is known, and can only be simple buy or sell orders. Some funds require that orders be placed hours or days in advance.

((above point was highlighted by Winston))

Closed-end funds trade on exchanges and in that respect they are like exchange-traded funds (ETFs), but there are important differences between these two kinds of security.

The price of a closed-end fund is completely determined by the valuation of the market, and this price often diverges substantially from the NAV of the fund assets. In contrast, the market price of an ETF trades in a very close range of its net asset value, because the structure of the ETF would allow major market participants to gain arbitrage profits if the market price of the ETF were to diverge substantially from the NAV.

The market prices of closed-end funds are often ten to twenty percent different than the NAV while the value of an ETF would only very rarely differ from the NAV by more than one-fifth of a percent.


**************

having discovered this difference....why would anyone be keen on CEFs, since they can potentially be priced significantly higher than the underlying NAV ?
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 16005
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Closed-End Funds

Postby tangoandrew » Sat Jul 05, 2008 11:24 am

i think ETFs are more index-based whereas CEFs tend to focus on a smaller basket of stocks, e,g, ICAP has abt 15 stocks or so...

btw, annual mgt fee for ICAP = 1.5% NAV (noted from the blog)...

so, ICAP (or CEF) is not so broadly-diversified & that explains ICAP has consistently outperform the KLCI benchmark..

k,.....i think reason why pple are willing to pay the premium could be the performance (consistent, abt 20+% p.a.) of the fund. that's why i highlighted the premium is now abt 3.3% compared with a massive 19% some mths back. that's why winston was surprised that this CEF is traded at a premium rather than at a discount, which is the case for the US CEFs that he has tracked.

so, it is only attractive to buy-in when the premium spread is low....and to make it more attractive is to hold long-term...
tangoandrew
Loafer
 
Posts: 21
Joined: Fri Jun 20, 2008 11:46 pm

Re: Closed-End Funds

Postby kennynah » Sat Jul 05, 2008 11:47 am

T : thanks... so, CEFs are traded for the difference in premiums and also for a dividend...however, if the NAV of the assets of the CEF is consistently at 20% lower than actual value, then what value is there to this asset class?

ETFs are not necessarily indexed based...they are so many of them that one can now find an ETF for just about anything, ranging from currency baskets, industry specific stocks, indexes, emerging countries' index, industry sectors, etc...
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 16005
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Closed-End Funds

Postby winston » Sat Jul 05, 2008 11:49 am

Hi k,

Thanks for the kind update.

So to recap. If an ETF is trading at a deep discount to it's NAV, the market players could buy the ETF and short it's component stocks, thus making on the arbitrage. Not sure that it is gonna be worthwhile though..

However, with a CEF, the component stocks could be changed by the Fund Manager so it is not really possible to arbitrage, unless by the Fund Manager himself who knows what the component stocks are.

Take care,
Winston
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Re: Closed-End Funds

Postby kennynah » Sat Jul 05, 2008 11:56 am

winston wrote:So to recap. If an ETF is trading at a deep discount to it's NAV, the market players could buy the ETF and short it's component stocks, thus making on the arbitrage. Not sure that it is gonna be worthwhile though..


Dear W : actually, each ETF is created and managed by licensed companies....usually very large financial houses...

the adjustments of the components within the ETFs can only be done by these creators of the ETFs...not the retailers...but technically, u r correct that this arbitrage opportunities exist occasionally, and there are professional arbitrageurs that will very quickly close the gap, hence ensuring ETFs are "fairly" valued. The arbitrage amount is usually very small, and become meaningfully profitable only when done in very large quantity transactions. These transactions are also usually computer automated...

winston wrote:However, with a CEF, the component stocks could be changed by the Fund Manager so it is not really possible to arbitrage, unless by the Fund Manager himself who knows what the component stocks are.


I am unsure if the component stocks can be altered in the life of the CEF....but clearly, the amount of shares issued for the CEF cannot fluctuate during the life span of the CEF.

I know much lesser about CEF becos it is not an instrument that excites me a whole lot... so more pertinent info posted about it is a welcomed knowledge to me...
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 16005
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Closed-End Funds

Postby winston » Sat Jul 05, 2008 12:03 pm

Now, if arbitrage opportunities exist, why is there such a big discount to the NAV, on some of the US listed Country Closed End Funds ?

Or does all the Country Closed End Funds listed in the US now trade at their NAV ?

I have not been following those Country Closed End Funds for a while and do not have up-to-date info on them anymore..
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Re: Closed-End Funds

Postby kennynah » Sat Jul 05, 2008 12:08 pm

u misunderstand...ETFs are fairly valued becos they can be arbitraged...whereas CEFs cannot be arbitraged hence the difference in price of CEF to the NAV of the underlying assets...
Options Strategies & Discussions .(Trading Discipline : The Science of Constantly Acting on Knowledge Consistently - kennynah).Investment Strategies & Ideas

Image..................................................................<A fool gives full vent to his anger, but a wise man keeps himself under control-Proverbs 29:11>.................................................................Image
User avatar
kennynah
Lord of the Lew Lian
 
Posts: 16005
Joined: Wed May 07, 2008 2:00 am
Location: everywhere.. and nowhere..

Re: Closed-End Funds

Postby winston » Sat Jul 05, 2008 12:14 pm

Does not explain why Country Closed End Funds listed in the US were trading at a huge discount many years ago. Maybe they are all trading at NAV now. Not up to date on the latest situation.

Does not really matter. Theoretical discussion :P
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Re: Closed-End Funds

Postby winston » Mon Feb 06, 2017 7:37 am

The Only Fund That Ever Goes “On Sale”

by Alexander Green

Source: The Oxford Club


http://www.investmentu.com/article/deta ... Je04_l96M8
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
User avatar
winston
Billionaire Boss
 
Posts: 118528
Joined: Wed May 07, 2008 9:28 am

Previous

Return to Other Investment Instruments & Ideas

Who is online

Users browsing this forum: No registered users and 7 guests

cron