Make Money with Closed-End Fund Activism [View article]
Dear Gwailo, Hawkeye sincerely apologizes for the very slow response to your thoughtful and instructive comments. Hawkeye was diverted to Reykavik in connection with his day job, then attended the annual seminar in Old Norse, and finally stuck around for the Saturnalia which they do so well there. Hawkeye accepts your point about the Sage of Omaha, but politely interjects that Mr. Buffett passed through Wharton, Columbia, and Cornhusker U., constantly travels, and keeps in touch with a huge number of movers and shakers. This differs from the Sage of Saskatoon who studied at the high school level, really hunkers down in the bunker, and talks to no one. Hawkeye has completed his assignment on the emerging market funds, but cannot insert a chart in this space. Apparently, this can only be done in the form of an instablog. Hawkeye will try this format and revert. Many thanks. Yours truly, Hawkeye
Make Money with Closed-End Fund Activism [View article]
Dear Gwailo, Thank you for bringing up this interesting topic. As an investor in several emerging markets closed-end funds, I would like to make a few comments specific to this sub-group. Investing in emerging markets closed-end funds may be an interesting and prudent strategy if carefully handled by knowledgeable managers. However, it can be quite dangerous, especially in a fund of funds format, if certain basic investment principles are not observed. - Prudent managers typically limit their investments in an individual fund to somewhere around 10% of total fund shares outstanding. This seems pretty basic, and the danger of owning "hog shares" in a fund would be prohibited by the investment policies of most major managers. Yet, a look at the 13F filings of some managers you have mentioned show many holdings above 20% and even 25% of total fund shares outstanding. A manager taking these foolish, risky positions becomes effectively trapped in the fund and cannot sell down without harming his own positions. I suggest a careful look at this issue before trying to piggy back on any of these investors. - Since the market assigns a discount to virtually all emerging market closed-end funds, I don't understand how an institutional investor can value a fund-of-funds at net asset value unless he had instant liquidity all the time. Maybe the trustees of the pension and endowment funds which hold shares in emerging markets funds of funds should think about the realism of valuing their holdings at net asset value, especially if the fund of funds in questions holds "hog share" positions as shown above. - One should also check the performance of the fund of funds. Most do not compare all that well against EEM or a well run, prudent emerging markets fund like EMF. Owning either of these probably offers better return with much less risk than the fund of funds managers you mentioned. - One reason for the less than stellar performance of the funds of funds is the 2 layers of fees. It is very hard to earn returns that offset even one layer of fees, and 2 layers seems very imprudent. Are the pension and endowment investors in these funds of funds aware of this and are they acting prudently? - I have heard through the grapevine that some managers of funds of funds do not follow the Risk Metrics recommendations on proxy votes. Are the investors in funds of funds aware of this? - Finally, while there are excellent managers out there (EMF) and low cost index alternatives available (EEM), some of the managers of the emerging markets funds of funds have the most appalling academic backgrounds, have never lived or worked in an emerging market, and operate out of bunker-like operations in obscure rural areas. Contrast this with an accomplished manager like Mark Mobius, with a doctorate in economics from MIT, years of living and working in emerging markets, and a practice of traveling the world, listening to people, and observing companies in action. So you bring up some interesting points. There are good managers out there using this strategy. Lazard comes to mind. There are also some very underqualified managers taking enormous risks with their investors money. Investors should look into this and be very careful with their money. I always listen to accounting professors and Cantonese scholars, retired or otherwise, so I would appreciate your thoughts on this. Thanks for the stimulating article. Sincerely, Hawkeye
Make Money with Closed-End Fund Activism [View article]
Make Money with Closed-End Fund Activism [View article]
- Prudent managers typically limit their investments in an individual fund to somewhere around 10% of total fund shares outstanding. This seems pretty basic, and the danger of owning "hog shares" in a fund would be prohibited by the investment policies of most major managers. Yet, a look at the 13F filings of some managers you have mentioned show many holdings above 20% and even 25% of total fund shares outstanding. A manager taking these foolish, risky positions becomes effectively trapped in the fund and cannot sell down without harming his own positions. I suggest a careful look at this issue before trying to piggy back on any of these investors.
- Since the market assigns a discount to virtually all emerging market closed-end funds, I don't understand how an institutional investor can value a fund-of-funds at net asset value unless he had instant liquidity all the time. Maybe the trustees of the pension and endowment funds which hold shares in emerging markets funds of funds should think about the realism of valuing their holdings at net asset value, especially if the fund of funds in questions holds "hog share" positions as shown above.
- One should also check the performance of the fund of funds. Most do not compare all that well against EEM or a well run, prudent emerging markets fund like EMF. Owning either of these probably offers better return with much less risk than the fund of funds managers you mentioned.
- One reason for the less than stellar performance of the funds of funds is the 2 layers of fees. It is very hard to earn returns that offset even one layer of fees, and 2 layers seems very imprudent. Are the pension and endowment investors in these funds of funds aware of this and are they acting prudently?
- I have heard through the grapevine that some managers of funds of funds do not follow the Risk Metrics recommendations on proxy votes. Are the investors in funds of funds aware of this?
- Finally, while there are excellent managers out there (EMF) and low cost index alternatives available (EEM), some of the managers of the emerging markets funds of funds have the most appalling academic backgrounds, have never lived or worked in an emerging market, and operate out of bunker-like operations in obscure rural areas. Contrast this with an accomplished manager like Mark Mobius, with a doctorate in economics from MIT, years of living and working in emerging markets, and a practice of traveling the world, listening to people, and observing companies in action.
So you bring up some interesting points. There are good managers out there using this strategy. Lazard comes to mind. There are also some very underqualified managers taking enormous risks with their investors money. Investors should look into this and be very careful with their money. I always listen to accounting professors and Cantonese scholars, retired or otherwise, so I would appreciate your thoughts on this. Thanks for the stimulating article. Sincerely, Hawkeye