Rights Offering Makes Mexico Fund Attractive

Barron's publishes several charts each week (from Thomas J. Herzfeld Advisors) that can be used to track the general valuation levels for closed end funds. The % Discount from Net Asset Value chart is currently at a premium of about +4%, while just a year ago it was at an average discount of about -5%. So at least on average, closed end funds are not a good buy right now.

But the Mexico Fund (MXF) may be an exception. It is currently selling at a discount to NAV of 17.0% which is well above its average discount of the last few years. One reason for the recent widening of the discount is that a transferable rights offering is underway.

Last month, MXF shareholders received one right for each share they owned. The rights entitle holders to subscribe for additional shares of the Fund's common stock at a discounted price. The subscription price will be determined based upon a formula equal to 95% of the average of the last reported sale prices of a share of the Fund's common stock on the NYSE on the Expiration Date (April 21) and the four preceding trading days. Holders can purchase one share of common stock for every three rights held. The rights are currently trading for around 0.70 which is a one or two cent premium over their expected value later this month.

If MXF has a price of 41, each right would be worth (0.05* 0.41)/3.0 or about 0.68. The reason for the small rights premium is probably liquidity. An institution who wants to buy say 20,000 shares of MXF might "move" the price five cents or more. They can buy 60,000 rights instead at a premium of only one or two cents.

Here are some reasons I like MXF:

Discount to NAV: The discount to NAV is well above the average of the last few years. I believe the discount will gradually shrink once the rights offering is over.

Relative Value: There are currently two closed end funds that invest exclusively in Mexico- MXF and MXE. There is also an ETF (EWW) that sells at parity with NAV. MXE sells at a 2.6% premium over NAV. One reason for the MXE premium is that closed-end fund activist Phil Goldstein is the Chairman of the Board. They have also filed with the SEC to allow them to offer managed distributions which usually shrink discounts and often lead to premiums over NAV.

MXF seems like a much better value than either MXE or EWW. And it is quite likely that some of the institutions buying MXF using the rights offering may be activist investors. If so, it is quite possible that MXF will be pressured to lower its discount down the road.

MXF Fund Inflows: The rights offering will bring significant inflows into MXF (around $200 million) which could give a short term boost to its NAV.

Risks

The Mexican market has been very strong for quite some time. For example, MXF is up around 49% over the past year. There is also some political risk in an emerging market country like Mexico.

The MXF discount to NAV is low compared to the last few years. But at times in the more distant past it has been higher. For example, on May 31, 2000 the discount to NAV was 32.5%.

Full Disclosure: I am long MXF.

MXF 1-yr chart: