Investors are paying $18.50 per share of CRF when it is not worth more than $9.81, its net asset value (“NAV”) per share. Investors in CLM are paying $9.23 when it is not worth more than $5.19 per share.
CRF’s and CLM’s market prices are respectively 88 percent and 77 percent higher than they should be, yet researching these closed end fund’s NAV (their intrinsic values) could not be easier. Just go to Morningstar or ETF Connect and type in the ticker symbols and SHAZAAM! There you have it. Along with a fund’s NAV these websites will display the current market price as well as whether the fund trades at a premium or discount to NAV.
Well, if that’s too much work or if the logic of the argument doesn’t make any sense investors can just read Cornerstone’s own disclosures. On May 18, 2007 Cornerstone’s press release stated:
An investment in a Fund is subject to certain risks, including market risk. In general, shares of closed-end funds often trade at a discount from their net asset value [NAV] and at the time of sale may be trading on the exchange at a price that is more or less than the original purchase price or the net asset value.
In other words, investors have no one to blame but themselves if they purchase shares at a premium to NAV and sell them at a discount to NAV.
Well…is there any reason why investors should believe that Cornerstone’s monthly distributions are adding to their investment results? Again, Cornerstone’s own disclosures should make the situation clear. The May 18, 2007 release states:
A substantial portion of each Fund's distributions made during this current calendar quarter may consist of a return of the investor's capital. Accordingly, these distributions should not be confused with yield or investment return on the Fund's portfolio.
That, however, is exactly what investors are doing. There can be no explanation for this insane market inefficiency other than investor ignorance and confusion. Unfortunately, investors have no one to blame but themselves. Regardless of these significant disclosures, investors have turned a blind eye. Securities laws will not protect investors when they themselves have failed to protect themselves.
In conclusion, I believe that these funds are not ponzi schemes. They are, however, sucker bets.
Disclosure: Author is short CRF
