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 (25 per cent) and Canadian World Fund (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 (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 (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 (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.
In September, the fund, without a public explanation, cut unitholders a rare break that one almost never sees in Canada: The fund manager, Goodman & Co., a subsidiary of Bank of Nova Scotia, temporarily reduced its annual administration fee to 0.5 per cent from 1 per cent of net asset value, for the next two years.
Scotiabank declined to comment on the reduction.
Unit holders can take some comfort that the fund has two big name investors on their side: City of London Investment Management and Lazard Asset Management. The two have a combined holding of about 30 per cent, according to the most recent annual information form.
At the same time the fund announced the cut in the fees, it also initiated a plan to distribute about 10 per cent of the fund annually back to holders through a quarterly payout, another plus that might help narrow the discount.
Ultimately, the fund’s value will depend on investor interest in India. “Although global equity markets have experienced notable volatility over the past several years, the long-term growth story in India has not changed and the fundamentals of the Indian equity market have only improved,” asserted Rohit Sehgal, DPF’s manager, at the time of the fee cut.
Economic Investment Trust (33 per cent) and United Corporations (31 per cent). These two funds have been around since the late 1920s and are the main investment vehicles for Toronto’s old money Jackman family.
The funds hold blue chip stocks, operate with a long term buy-and-hold philosophy, and sport some of the lowest management fees (well under 0.5 per cent of assets) in Canada. Economic has a less diversified portfolio and consequently might more be more risky because it holds a major stake in the family’s insurance company, E-L Financial.
The Jackmans are presumably the most knowledgeable investors in the two trusts and see a bargain. They have regularly been buying small amounts of the stock in the two companies on open market to increase their controlling stakes. If the family were to realize the discount by taking the two trusts private and liquidating the shares in them they’d be a cool $300-million richer.
Asked if the Jackmans have any plans to take them private, spokesman Mark Taylor said, “I can’t comment on that.”
He said the discounts have varied from approximately 20 per cent to 50 per cent over the past two decades. The discounts were largest during the tech bubble when investors were clamouring for risky overvalued stocks like Nortel, and not the safer blue chips that are the funds’ stock in trade.
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