Last year, I published a performance analysis of closed-end fund IPOs that were issued the first seven months of 2009. This is an update of that report for IPOs that were issued in the twelve months from August, 2009 through July 2010. All of these funds are “seasoned” and have traded for at least six months.
Ticker | Inception NAV | Current NAV | NAV Gain | Inception Mkt Prc | Current Mkr Prc | MKT Gain | Inception |
(NEV) | 14.33 | 12.66 | -11.7% | 15 | 12.12 | -19.2% | Sep. 2009 |
(JLS) | 23.83 | 25.97 | +9.0% | 25 | 25.07 | +0.3% | Nov. 2009 |
(STK) | 19.06 | 21.05 | +10.4% | 20 | 19.72 | -1.4% | Nov. 2009 |
(GDO) | 19.06 | 19.83 | +4.0% | 20 | 18.16 | -9.2% | Nov. 2009 |
(IDE) | 19.06 | 21.78 | +14.3% | 20 | 19.61 | -2.0% | Jan. 2010 |
(FTT) | 19.06 | 17.86 | -6.3% | 20 | 16.23 | -18.9% | Jan. 2010 |
(DMO) | 19.06 | 22.71 | +19.2% | 20 | 22.05 | +10.3% | Feb. 2010 |
(JMT) | 23.83 | 26.00 | +9.1% | 25 | 24.44 | -2.2% | Feb. 2010 |
(NBB) | 19.10 | 18.62 | -2.5% | 20 | 17.89 | -10.6% | Apr. 2010 |
(BSL) | 19.06 | 19.88 | +4.3% | 20 | 20.20 | +1.0% | May 2010 |
(EXD) | 19.06 | 17.98 | -5.7% | 20 | 16.51 | -17.5% | June 2010 |
(CEM) | 19.07 | 21.61 | +13.3% | 20 | 21.83 | +9.1% | June 2010 |
(NTG) | 23.88 | 25.32* | +6.0% | 25 | 24.70 | -1.2% | July 2010 |
* NAV values are as of 1/28/2011 except for NTG. The NAV for NTG is as of 1/21/2011. The 1/28/2011 NAV was not yet available at publication time.
Avg NAV gain= +4.9%
Avg Mkt gain = -4.7%
Underperformance=9.6%
There were 13 IPOs that met the criteria. Just like last year, the market performance for every fund was worse than the NAV performance. This occurs because the NAV premiums from underwriting fees are replaced by discounts below NAV within six months.
Note that some of the new IPOs did have positive absolute performance. For example, DMO gained 10.3% on top of its dividend return. But the NAV value of DMO gained 19.2%, so the closed-end fund “wrapper” underperformed the underlying fund assets.
By an odd coincidence, the market price underperformance of 9.6% this year was exactly the same as last year’s underperforming closed-end fund IPOs. As a general rule, it seems that you lose about 10% when you buy a closed-end fund at the IPO price, compared to buying the underlying assets directly which is comparable to a no-load open-end mutual fund.
A research paper “A Liquidity-Based Theory of Closed-End Funds” tries to develop a rational liquidity-based model to explain why investors are willing to buy a closed-end fund at a premium at the IPO price when they know that it will soon fall to a discount.
They reason that many closed-end funds hold illiquid, hard-to-trade underlying assets. Retail investors would find it very difficult to trade these assets directly, so they are willing to pay a premium to avoid the large illiquidity costs, especially if there are no equivalent no-load funds available for those assets.
But it is hard too see why a rational investor who wanted to buy the fund wouldn’t just wait for six months. In spite of the arguments presented in the research paper, I still believe that the main reason closed-end funds are successfully marketed is because they are sold to less sophisticated investors and earn higher commissions for stock brokers than a normal trade.
In spite of the overwhelming evidence that new issue closed-end funds generally underperform, they are still being successfully marketed. There were eight more closed-end funds issued later in 2010. It appears that “inefficiencies” in the world of closed-end funds are alive and well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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