TACTICAL TRADING STRATEGIES FOR CLOSED-END FUNDS Mark Dauenhauer Nina Gené Vince Groff Wee Yee Brad Winer InternationalDiversified Equity Advisors (IDEA) International Diversified Equity Advisors (IDEA)

What is a closed-end fund? Publicly traded investment company Fixed number of shares issued through IPO Trade on market exchanges (NYSE,AMEX) Types: growth, value, sector, small-cap, country funds … Traded at a non-constant premium/ discount

Initial Observations We noticed negative correlation between current month price returns and previous months premium –Japan OTC Equity Fund, -11% correlation –Asia Pacific Fund, -13% correlation We noticed that premiums/discounts persisted for months/years These observations led to 2 strategies

Premium/ Discount vs Price Return

Naïve Strategy An equally weighted portfolio of all 29 funds gives the following performance:

A Better Strategy Going long in the 5 highest discount funds and short in the 5 highest premium funds with uneven weights (30%,30%,20%,10%,10%) gives:

A Winning Strategy We divided funds into ‘good’ and ‘bad’ based on a 3 month moving average of the premium/discount We buy the ‘good’ funds with the lowest premium and short the ‘bad’ funds with the lowest discount. We used uneven weightings as follows:

Results of Winning Strategy

The Unpublished Strategy

Other Attempts We tried to predict the existence of a premium or discount based on the performance of the underlying NAV vs. a benchmark –And Got Nothing! We looked at a 6 month hold strategy for each of our strategies and found that the 1 month hold strategy worked better.

Another Idea to Pursue Calculate a Beta of the price (or premium) vs. the NAV for each fund. Use a prediction regression to predict NAV movements or use a sort strategy Trade on funds that have highest premium sensitivities to NAV movements (high Betas)

The Future: Shareholder Activists Activists target funds with poor NAV performance 8 funds have converted into open-end format 5 funds had to be liquidated (2.3 bn) 27 funds announced share buybacks Removing fund managers Mandatory distributions

Questions

Data Collection Chose 29 funds for which we could get NAV and price data from 4/1/92 to 12/31/99 Dividend Issue Funds represent a well-diversified global portfolio