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Normally, you can only purchase a no-load open-end mutual fund by paying the end-of-day net asset value price. But currently, there is a rare opportunity to use a closed-end fund as an entrée into an open-end no-load mutual fund at a discounted price. The Blue Chip Value Fund (BLU) is a closed-end fund. But its stockholders and board of directors have approved the reorganization of the Fund into the Westcore Blue Chip Fund (ticker:WTMVX) which is a no-load open-end mutual fund.
The conversion and re-organization date will be on March 28, 2011, but the last day of trading in BLU will be Thursday, March 17, 2011. As of today’s close, BLU is selling at a 2.24% discount to net asset value. On the reorganization date, you will receive shares of the Westcore Blue Chip Fund based on a swap of the net asset value in each fund. So if you bought BLU today, you are effectively buying the Westcore Blue Chip Fund at a discount to net asset value with a small time delay.
There are a few things to keep in mind here:
1) The Westcore Blue Chip mutual fund has a 2% 90-day exit redemption fee, so in order to realize the discount you have to wait at least 90 days after the March 28 purchase date.
2) Both BLU and WTMVX are large cap “blend” funds that are highly correlated with the S&P 500 index. The six month correlation between SPY and WTMVX is around 98%.
3) For diversified investors in a retirement account, it may make sense now to swap your existing large cap holding with BLU, hold WTMVX for at least 90 days thereby picking up the 2% discount. Once the 90 days are up, you can continue holding WTMVX if it performs well or swap back into another large cap fund later. Of course, this assumes you can trade BLU for at a low cost.
4) For short term traders or arbitrage players in a margin account, you can buy BLU and sell short SPY equally weighted. The holding period for the arbitrage would be under four months. That eliminates nearly all of the market risk, and you would earn over a 2% return in less than four months.
I have included some basic information on WTMVX below:
Westcore Blue Chip [ticker: WTMVX] Large Cap Blend
Total assets: $36 million
Expense ratio: 1.15%
Turnover: 39%
Yield: 0.59%
Year to Date Performance: +5.94% vs. +5.42% for S&P 500 (as of March 3, 2011)
Top 10 Equity Holdings
Intl Bus Machines
4.04%
Occidental Petroleum
3.65%
Marathon Oil
3.56%
JP Morgan Chase
2.94%
Symantec
2.66%
Microsoft
2.59%
Dell
2.58%
Norfolk Southern
2.51%
Amgen
2.47%
Pfizer
2.31%
Disclosure: I am long BLU.
Source: Blue Chip Value Fund: How to Use a CEF to Buy an Open-End Mutual Fund at a Discount