One of the more obscure areas of the Toronto market are closed-end funds. They trade just like the shares of ordinary companies, but generally aren't immediately redeemable into cash the way that a mutual fund is. That means they often trade at a discount.
Here's a closer look at seven of the more interesting closed-end funds on the TSX (discounts in brackets):
Canadian General Investments CGI-T (25 per cent) and Canadian World Fund CWF-T (32 per cent) These funds are controlled by the old money Morgan family in Toronto through substantial holdings of the shares outstanding.
In an interesting development, the Morgans took private Third Canadian General Investments, another closed-end fund they controlled, last year at a substantial premium to the market price. Of the family’s two remaining funds, Canadian World is the smaller and would be easier to privatize, but Mr. Smedley cautioned that “there is no indication” the family is considering such a move.
Even if there isn’t a privatization, Canadian World might be a good bet. Over the past decade, it has handily outperformed the Morgan Stanley Capital International All Country World Index.
Canadian General aims to have an annual distribution equal to a yield of 5 per cent and has been grandfathered with a favourable tax treatment allowing it to pass capital gains to shareholders, according to Mr. Smedley.
Mr. Smedley says offshore investors have recently been piling into Canadian General, controlling about 60 per cent of the non-Morgan shares, to gain a discounted price exposure to the Canadian market, which is attracting offshore money because of the country’s rising profile as a safe harbour for capital.
Copernican British Banks Fund CBB.UN-T (18 per cent). This trust had the misfortune of coming to market at $10 a share in 2007, and investing mainly in British banks just before their share prices collapsed during the financial panic.
It’s definitely been a dog, and the fund’s price is now flirting with penny stock status. But the future may be brighter.
About 85 per cent of its portfolio is now concentrated in six extremely strong banks that are unlikely to crash and burn in all but a financial Armageddon scenario. Among others, it holds HSBC Holdings, JP Morgan, Wells Fargo and Standard Chartered. “The banks that are in that fund are the banks that have come through this crisis,” says Copernican’s portfolio manager Chris Wain-Lowe.
The fund’s banks are trading well below book value, and may offer better relative value than Canadian banks, which are trading for twice book, Mr. Wain-Lowe says.
Another interesting kicker: investors in the fund can redeem their holdings, but have to pay a 35 cent a share penalty. The amount drops to 30 cents next year. But starting in January, 2014, holders will be able to cash in at net asset value, suggesting the discount will then vanish. That means buyers now could make double digits returns on their money even if the value of its portfolio remains unchanged for the next two years.
Coxe Commodity Strategy Fund COX.UN-T (11 per cent). Investors seeking a diversified portfolio of big name resource companies should take a look at this fund, which offers exposure to mining, energy, base metals and precious metals, at a nice discount. It’s managed by Donald Coxe, the well-regarded Chicago-based commodity guru.
The discount is surprising, considering holders can redeem the fund each year in September at the net asset value. The fund also has a Coxe clause. If Mr. Coxe gets hit by a truck, quits the fund business or otherwise stops being portfolio managers, holders can bail out at net asset value.
DPF India Opportunities Fund DPF.UN-T (21 per cent). Issued in 2007, just before the crash, this trust promptly cratered. But it may be on the mend. As its name suggests, it invests in India, one of the world’s most rapidly growing economies.
