While conducting research on the Cornerstone Funds earlier this year, I came across George Spritzer’s article dated Feb 20, 2007. He discusses the mysterious NAV premiums of two Cornerstone funds: Cornerstone Total Return Fund (NYSEMKT:CRF) and Cornerstone Strategic Value Fund (NYSEMKT:CLM).
It is not atypical for funds to trade at slight premiums or discounts to NAV (strength of management, liquidity issues, international positions, etc.). This being said, nothing seems to justify the 90% premium to NAV for a manager whose top holdings basically mirror the Dow. In his article, Mr. Spritzer asks “If any of my readers have any ideas as to why Renaissance may be holding these two fund positions I would love to hear them.” I have a possible explanation as to why a firm would be long these two funds.
Up until a few months ago, any investor (including insiders) that owned these two funds and opted for the dividend reinvestment policy (as opposed to cash) was receiving its new shares at net asset value upon distribution. Considering the premiums both of these funds traded to NAV, one could sell these new shares in the market at a huge profit. It appears that Renaissance also figured out this loophole. My suspicion is that their position was possibly “boxed” both long and short; they were paying the dividend in cash on their short and collecting the dividend on their long via highly discounted shares – essentially a riskless trade. As George Spritzer mentioned in his article, Renaissance does not have to disclose short positions in their SEC filings.
Why am I writing a post exposing this fantastic inefficiency? It’s simple: the game has come to an abrupt end. As per the fund’s most recent 10-K filing, Cornerstone altered their dividend reinvestment policy and no longer issues shares at NAV. Perhaps Cornerstone sensed regulatory heat… maybe they felt the trade was too crowded and needed to pause for a few months.
Disclosure: The firm with which the Author is affiliated is short CRF