Roger Nusbaum (wish list) submits: Here is an email exchange I had with a long time reader. His email is italics, mine is bold, and I add some notes in the standard font:
Hi Roger,
I have some of the Madison claymore covered call CEF [closed-end fund]. My broker recommended it soon after it came out and I have been happy with it. I know some of your clients hold it. My broker has called me about a new CEF IPO doing covered calls on the S&P 500 from Nuveen, symbol JPG.
Somewhere, maybe on your blog, I remember reading that anyone that bought one of these at the IPOs was a damn fool (I don't think I was that harsh, but IPOs of CEFs have a premium that has nothing to do with supply and demand in the market, only paying people that sell the fund), because they typically drop to about the price that would have been paid without the commission which in this case is 4.5% ( the hidden commission on these is always very high) soon after the IPO. What is your take on this? It makes sense to me to wait a little bit after the IPO and then buy if this is the case. Have you ever noticed that they drop in NAV after the IPO? Thanks
Anytime you by a CEF on the IPO you are buying at a premium. The premium goes to pay your broker and the brokerage firm and so on. Usually the premium at IPO does erode and with these types of funds I would expect that to be the case (because there are so many funds like this already) (buying at a premium is not necessarily bad but as mentioned above the premium for an IPO has nothing
