Thus spake Zarathustra's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/36736/comments http://seekingalpha.com/article/38722-on-the-first-trust-value-line-100-etf-conversion-advantages-and-drawbacks?source=feed#comment-89113 89113
That all sounds very nice, but the real facts are these:

Doliver showed up with a large position in FVI, which continued to trade at a large discount. First Trust decided to recommend a conversion to an ETF to head off an unannounced, yet perceived threat. A few days later, they added FVD to their conversion list, rather than go to war with Art Lipson who had acquired a large position of that fund at a discount and was rattling his sabre. First Trust neglected to include FVL in the list of conversions, because there were no threats to FVL at that time. Next, they liquidated FVI in order to avoid a proxy fight over its conversion. Lipson supported the FVD conversion and it went through. A few months later, Doliver showed up with a large position in FVL. First Trust then announced that they would convert it into an ETF as well, heading off another perceived threat. Apparently, there was no opposition to the FVL conversion, and it was recently completed.

There are four things that eventually happen when closed-end funds trade at large discounts and sophisticated, large investors get involved: (1) they convert into or merge with open-end funds, (2) they liquidate, (3) they convert to ETF's, or (4) they announce managed distribution policies that involve high payouts and returns of investor's capital.

Certainly someone needs to put a stop this this sort of thing. Otherwise, the large asset management companies will not find it lucrative enough to bring out new closed-end funds and they will die out. Perhaps we need legislation that makes acquiring large positions in discounted closed-end funds illegal.]]> Tue, 19 Jun 2007 21:32:16 -0400
That all sounds very nice, but the real facts are these:

Doliver showed up with a large position in FVI, which continued to trade at a large discount. First Trust decided to recommend a conversion to an ETF to head off an unannounced, yet perceived threat. A few days later, they added FVD to their conversion list, rather than go to war with Art Lipson who had acquired a large position of that fund at a discount and was rattling his sabre. First Trust neglected to include FVL in the list of conversions, because there were no threats to FVL at that time. Next, they liquidated FVI in order to avoid a proxy fight over its conversion. Lipson supported the FVD conversion and it went through. A few months later, Doliver showed up with a large position in FVL. First Trust then announced that they would convert it into an ETF as well, heading off another perceived threat. Apparently, there was no opposition to the FVL conversion, and it was recently completed.

There are four things that eventually happen when closed-end funds trade at large discounts and sophisticated, large investors get involved: (1) they convert into or merge with open-end funds, (2) they liquidate, (3) they convert to ETF's, or (4) they announce managed distribution policies that involve high payouts and returns of investor's capital.

Certainly someone needs to put a stop this this sort of thing. Otherwise, the large asset management companies will not find it lucrative enough to bring out new closed-end funds and they will die out. Perhaps we need legislation that makes acquiring large positions in discounted closed-end funds illegal.]]> http://seekingalpha.com/article/38086-the-cornerstone-funds-are-sucker-bets?source=feed#comment-88679 88679
I wrote: "The "sucker" buying in at a 75% premium and holding forever will realize an ongoing return of about 5.1% (9%/1.75=5.1%).

Actually, the math is more complicated, and a 75% premium level is just too high. If the portfolio total return is 9% after expenses, a 23% premium will provide a long term, tax advantaged return of 5.1% . Paying a 75% premium and holding forever results in a 0.0% net long-term return, not 5.1%.]]> Fri, 15 Jun 2007 07:22:57 -0400
I wrote: "The "sucker" buying in at a 75% premium and holding forever will realize an ongoing return of about 5.1% (9%/1.75=5.1%).

Actually, the math is more complicated, and a 75% premium level is just too high. If the portfolio total return is 9% after expenses, a 23% premium will provide a long term, tax advantaged return of 5.1% . Paying a 75% premium and holding forever results in a 0.0% net long-term return, not 5.1%.]]> http://seekingalpha.com/article/38086-the-cornerstone-funds-are-sucker-bets?source=feed#comment-88470 88470
Perhaps they have figured out how to make continued high returns on the long side of these two funds, due to the high "negative rebate fee". I wonder what the implications are for the premium to maintain its high levels. If Cornerstone resets the distribution every year at 21% of NAV, and the market continues to price these funds at a "yield" to market price of 12%, perhaps the indicated 75% premium level (21%/12%-1=75%) will go on forever!

Think about it. If the market appreciates 10% a year, the portfolios of CRF and CLM will appreciate about 9% a year after expenses but before distributions. This means their NAV will decline about 12% a year after distributions. Because of the reset, this can be repeated every year indefinitely. All that is required is for the Funds to do reverse stock splits every few years to keep stock price respectable, and to merge in new assets from other captured closed-end funds every few years to keep the Fund sizes and expense ratios reasonable. This has already been done once with the merger of MGC into CLM a couple of years ago.

The "sucker" buying in at the 75% premium and holding forever will realize an ongoing total return of about 5.1% (9%/1.75=5.1%). Since the distributions are dependable and monthly, and classified as either tax deferred return of capital or long term gains, this isn't really terrible in today's world in comparison with fully taxable CD rates. Besides, this "investment illiterate sucker" can kid himself into thinking that he is getting 12% mostly tax free (wrong, but a good cocktail brag!). In reality, this is all just an "annuity" which doesn't compare all that badly with what the insurance industry offers.

Just some food for thought....]]> Wed, 13 Jun 2007 14:49:23 -0400
Perhaps they have figured out how to make continued high returns on the long side of these two funds, due to the high "negative rebate fee". I wonder what the implications are for the premium to maintain its high levels. If Cornerstone resets the distribution every year at 21% of NAV, and the market continues to price these funds at a "yield" to market price of 12%, perhaps the indicated 75% premium level (21%/12%-1=75%) will go on forever!

Think about it. If the market appreciates 10% a year, the portfolios of CRF and CLM will appreciate about 9% a year after expenses but before distributions. This means their NAV will decline about 12% a year after distributions. Because of the reset, this can be repeated every year indefinitely. All that is required is for the Funds to do reverse stock splits every few years to keep stock price respectable, and to merge in new assets from other captured closed-end funds every few years to keep the Fund sizes and expense ratios reasonable. This has already been done once with the merger of MGC into CLM a couple of years ago.

The "sucker" buying in at the 75% premium and holding forever will realize an ongoing total return of about 5.1% (9%/1.75=5.1%). Since the distributions are dependable and monthly, and classified as either tax deferred return of capital or long term gains, this isn't really terrible in today's world in comparison with fully taxable CD rates. Besides, this "investment illiterate sucker" can kid himself into thinking that he is getting 12% mostly tax free (wrong, but a good cocktail brag!). In reality, this is all just an "annuity" which doesn't compare all that badly with what the insurance industry offers.

Just some food for thought....]]> http://seekingalpha.com/article/20896-investors-don-t-believe-everything-you-read?source=feed#comment-79195 79195 Fri, 15 Dec 2006 16:47:40 -0500