Published by Closed-End Fund Advisors, Inc.
August 2001, Volume I, Issue 4
2001 Second Quarter Performance Summary
George Cole Scott, Editor
Closed-End Funds Continue Positive Trends
Kansas City, MO — Performance for the three months ended June 30, 2001 in closed-end funds continues a trend in which increases in underlying net assets, together with narrowing discounts, have combined to create positive average total returns for investors. International closed-end funds have been leading the way in discount narrowing. Over the past six months, the average discount for the sector has fallen from -23.5% on December 31, 2001 to -14% on June 30, 2001. This is an improvement of +9.5%. For the second quarter, domestic equity funds delivered solid net asset value performance and enhanced market price performance due to the narrowing discounts.
Closed-End Fund Discounts at Lowest Level since 1999
New York, July 12, 2001 — Investors in closed-end funds enjoyed moderately positive returns during the second quarter of 2001 with their funds now trading at share prices closer to net asset value(NAV) than at any time in the past two years, according to an analysis by Lipper. Total assets in closed-end funds climbed slightly in the latest quarter to $140 million, mainly reflecting initial public offerings and relative stability in the bond markets, where nearly 75% of the funds invest. "Closed-end fund investors benefit in two ways: when the fund's portfolio gets a boost and when the fund's share price moves up in relation to its net asset value," said Don Cassidy, senior analyst for Lipper. "The stars were in alignment this quarter, with funds showing decent portfolio performance and discounts hitting two-year lows."
The average closed-end fund delivered a +1.35% return on a NAV total return basis (reinvesting dividends immediately on ex-date at NAV) during the second quarter. Equity funds, which account for only 25% of the closed-end fund population, produced an average gain of +4.86% on a portfolio basis; bond funds gained a slim 0.19%. Domestic equity funds(+6.38%) outperformed their world-markets counterparts which gained an average +3.26% as Western Europe (-2.95%) was the only declining area. Among bond funds, all municipal bond types except California funds showed gains. Among taxable funds, world income (+3.20%) gained more than did domestic portfolios. Quality was a clear issue, as high yield (with or without leverage), flexible and loan-participation funds showed losses on average while nearly all other types had portfolio gains. Value equity funds produced the top three month returns in the entire closed-end fund universe at +11.12% while high-yield funds averaged a +6.78% portfolio loss. After adjustment for the narrowing discounts and widening premiums, every type except high yield funds produced average positive returns on a market basis during the June 30 quarter. Only 28% of individual funds produced negative returns on a NAV basis, and 84% were in the black on a market-price basis. Over the past 12 months, the domestic equity sector posted an average total return on a market price basis of +10.3%. This compares with the S&P 500 Index which delivered a -14.8% over the same period, for a differential of approximately 25%.
Business Eyes Olympic Gold In Beijing
Beijing, China (CNN) — The Beijing 2008 Olympics will trigger a flood of investment from major international corporations in China, analysts say. The chance to use the world's highest profile sporting event as a marketing platform in the world's most populous nation promises investment above and beyond the up-front investment required to stage the Games. Because of the expected windfall from this event, we have stepped-up investment in China. The best way to invest in China is through closed-end funds because of the diversification, experience and being able to purchase the funds at a discount. We chose Templeton Dragon Fund over the other funds because of the experience of the manager, its size and liquidity.
Templeton Dragon Distributes
Templeton Dragon Fund, Inc.(TDF/NYSE) announced its quarterly distribution from net investment income of $0.2651 per share, payable on June 25,2001 to shareholders of record on June 14, 2001. Shareholders who participate in the Fund's dividend reinvestment and cash purchase plan will receive their distributions in additional shares of the Fund. According to the Fund's managed distribution policy, the Fund makes quarterly distributions to shareholders equal to 2.5% of the Fund's net asset value at the close of the New York Stock Exchange on the Friday prior to each declaration date. The next distribution is expected to be in late September. To the extent the Funds' s quarterly distributions exceed the Fund's actual net asset income and net capital gains for the Fund's fiscal year, a portion of the distributions may have to be reported to the shareholders as a return of capital for tax purposes. TDF is designed for investors seeking long-term capital appreciation and under normal market conditions invests at least 45% of its total assets in the equity securities of "China companies." The discount on August 16 was -15.30% versus -27.06% a year ago.
TDF has also announced that in a continuing effort to improve the discount between the Fund's share price and its net asset value the Fund has established a "Measurement Period" to evaluate the discount and to determine whether to commence a tender offer for the shares or to open-end the fund at net asset value. It will take a majority of two thirds of the Board of Directors to accomplish this and, failing that, will require approval of two thirds vote of the voting securities to open-end the fund. The Fund has a share repurchase program and through June 15, 2001, has repurchased 5,261,000 (9.7%) of its common stock (It is our experience that open-ending votes usually fail, hopefully, because the shareholders want to keep the closed-end fund structure). The Fund's investment advisor is the Hong Kong Branch of Templeton Asset Management Ltd, a wholly-owned subsidiary of Franklin Resources, Inc. The San Mateo, CA based company had approximately $269 billion in assets under management as of April 30,2001. For more information, please call 1-800-342-5236, Franklin Templeton Fund Information, San Mateo, California.
Legg Mason to Buy Royce
Royce Value Trust (RVT/NYSE) Legg Mason, Inc, reached a definite agreement to buy Royce & Associates for an initial $115 million and additional payments to bring the total price to $215 million, the companies said in a press release issued in July. The New York fund manager of mutual and closed-end funds is the oldest and largest small-cap closed-end fund. The Fund's advisor, Charles Royce, has more than 25 years of small and micro-cap investment experience. The fund’s year-to-date total return (to Aug 10th) was +11.08% (NAV) and +15.32% (market). The 52-week (to June 30) NAV return was +24.93% and +31.60% market. The three-year average annual return was +12.69% NAV and +10.53% market. The 10-year NAV return was +16.18% NAV and +15.49% market return. The net assets of RVT on June 30 was $865 million and the net leverage was 10%. The sector breakdown on June 30 was 18% technology, 13% Industrial Services, 12%% Industrial Products, 12% Financial Intermediaries and 10% Health Care. For reports, call 1-800-221-4268.
RCM Strategic Global Government to Merge
The Board of Directors of the RCM Strategic Global Government Fund, Inc (NYSE:RCS) announced that it has approved in principle a proposal to merge the Dresdner Strategic Income Fund (NYSE:DSF) into RCS. Dresdner said the boards of both funds approved in principle a proposal to offer Income Fund shareholders a price equal to 99.5% of net asset value at expiration of the tender offer. The merger would be consummated following the completion of a tender offer by DSF for up to 50% of its outstanding shares and is subject to a number of conditions, including shareholder approval of both funds. It calls for RCS to issue additional shares at net asset value in a tax-free exchange for the assets of DSF remaining after the completion of the DSF tender offer. The goal of the merger is to provide RCS shareholders with an opportunity for a lower overall expense ratio and more liquidity in terms of daily trading volume and shares outstanding. The investment quality and overall average quality will not change as a result of the merger. The merger is expected to take place sometime in the third quarter.
RCS is a closed-end bond fund whose primary objective is to generate a level of income higher than that generated by high quality, intermediate term U.S. debt securities. RCS seeks to achieve its investment objective by actively managing a portfolio of U.S. and foreign debt securities with an average credit quality of AA. On August 10, the NAV of the Fund was $11.11 and a discount of -2.52%. Dresdner RCM Global Strategic Income Fund, (DSF) is a closed-end bond fund that seeks high income through global investment in debt securities while maintaining an overall investment grade quality. August NAV was $7.08 and it traded at a discount of -2.97%. Please call 1-800-237-4218 for further information or visit their web site at www.RCSfund.com.
Boulder Total Return Fund Raises Its Fees
The Semi-annual report for Boulder Total Return (BTF-NYSE) has just barely gotten shareholder approval to increase its advisory fee from 1.00% to 1.25%. No reason was given for the increase. The report shows that of the shares outstanding, 74.6% were represented at the annual meeting and 55.2% voted in favor of the increase, 16.4% against and 3% abstained. We strongly urge shareholders to write or email management to complain about this action. We have also been selling some of our shares, partly because of its high expense ratio and because the fund distributes little of its assets to shareholders.
Many Welcome New Fund Rules
A Securities and Exchange Commission regulation, scheduled to kick in later this year, will make it easier for mutual fund investors to gauge their tax liability. Last year in particular, as the market sank, many investors were surprised to learn that they had to pay capital gains despite losing money in the market. Beginning in October, the new rule will require funds to back up all claims of tax efficiency. Another rule, to take effect in February, will force all stock and bond finds to disclose after-tax results in the millions of prospectuses that they mail each year. It is unclear to the writer how closed-end fund investors will be informed of this. We will be watching whether their quarterly reports to shareholders will disclose this information.
Royce Value Trust, Royce Focus Trust and Royce MicroCap Trust. We welcome letters or comments from subscribers to The Scott Letter Online.
Note: None of the information contained herein should be construed as an offer to buy or sell securities or as recommendations. Performance results shown should under no circumstances be construed as an indication of future performance. Data, while obtained from sources we believe is reliable, cannot be guaranteed.
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