The Scott Letter: Closed-End Fund Report©
Published by Closed-End Fund Advisors, Inc.

October 2001, Volume I, Issue 6
Economic Recovery & Closed-End Fund Highlights
George Cole Scott, Editor

IPO Market Is Wide Open – For Closed-End Funds At Least

New York, October 9, 2001. According to Lipper, closed-end IPOs were one of the few bright spots for the funds business in the latest quarter, with 27 funds launching this year. This compares to six for all of 2000. Most of all of the CEF IPOs were bond funds. In currently bonds are a favorable asset class for investors. $4.24 billion dollars have been raised by the 27 new funds.

Closed-end fund investors fared considerably better in the September quarter than did owners of open-end mutual funds. This of course reflected the very different make up of the two populations. CEFs consist roughly of 120 equity portfolios and 373 bond portfolios. There are a much higher percentage of open-end funds investing in equities, which had a horrible quarter. In the last three months, 309 CEFs produced positive NAV returns and 210 (or just 40%) generated losses. Only seven (6%) of the equity funds were up: two gold, two preferred stock, one convertible, and two Pacific country funds.

For the third quarter the mean NAV/MKT performance was -2.9%/-3.7% and the median was 1.6%/0.2%. YTD the mean NAV/MKT performance was -1.8%/3.7% and the median was 4.4%/8.2%. Premium/Discount behavior was affected by September 11th. Through September 7th, CEF discounts had continued to narrow moderately in the third quarter. After a brief but sharp widening and recovery of most the ground lost in the shock phase, discounts ended the quarter mixed to slightly wider overall. The median discount for all CEFs had been 4.8% on June 30 and was basically unchanged at 4.7% on September 7th, but ended third quarter at 5.4%.

Premiums & Discounts for Closed-End Funds

  9/30/01 6/30/01 12/31/00
All Closed-End Funds -5.4%    -4.8%    -10.1%    
All Equity Funds -10.2%    -11.1%    -16.6%    
All Fixed Income Funds -4.6%    -3.8%    -8.8%    
Domestic Equity -6.3%    -6.9%    -12.6%    
International Equity -16.7%    -16.1%    -21.3%    
World Income -4.2%    -4.8%    -13.4%    
Tax-Exempt Fixed Income -5.1%    -4.7%    -10.2%    
Taxable Fixed Income -2.0%    -0.2%    -5.8%    
High Yield +8.3%    +8.7%    +3.3%    

DSF Dividend Announcement and Commencement of
Tender Offer

Renaissance Capital Group, Inc. is a Dallas, Texas based investment management firm that has been a Registered Investment Advisor since 1973. Renaissance is involved in the management of a series of public and private investment partnerships and funds. Currently, Renaissance Capital serves as Investment Advisor to three publicly traded closed-end funds, one in the United States and two in Great Britain. The U.S. fund, Renaissance Capital Growth & Income Fund (RENN) is a business development company regulated under the 1940 Investment Company Act. The combined assets of these three funds exceed $200,000,000.

Renaissance concentrates on small and micro-cap emerging growth companies. The Renaissance Funds have a strong emphasis on privately placed convertible debentures, but also invest in publicly traded equities and convertible debentures. The firm seeks to invest in publicly traded growth companies that have an established business process, profitable earnings, positive cash flow, attractive valuation and a quality management team with a major stake in the business. They are active long-term investors and extensive due diligence is part of their investment process. CEFA currently holds shares in RENN. For more information please contact Russell Cleveland at or call (214) 891-8294. CEFA currently holds positions in RENN, and has worked with the fund in a consulting relationship.

Source: Renaissance Capital

Tri-Continental Share Buy Back

New York, October 9, 2001. Tri-Continental (NYSE: TY) the nation’s largest diversified publicly traded closed-end fund, yesterday announced that through September 30, 2001 a total of 6.5 million shares have been repurchased as part of its stock repurchase program. This is approximately 5.3% of outstanding shares as of November 17, 2000, when the buy-back program was re-authorized.

In November 2000, the Board of Directors re-authorized the repurchase, over a 12-month period, up to 7.5% of its outstanding common stock shares as long as the discount remained wider than 10%. As of October 12, TY’s discount was -11.14%. The repurchase program seeks, among other things, to moderate the growth in the number of shares outstanding, increase the NAV of the common stock, reduce the dilutive impact on Stockholders who do not take capital gains distribution in additional shares, and increase the liquidity of the common stock in the marketplace. We are strong advocates of share repurchases.

Tri-Continental, managed by J&W Seligman & Co. Inc was founded in 1864.  For more information on Tri-Continental check out

Source: Tri-Continental

Hambrecht & Quist: Announce Management Changes

Boston, September 27 , 2001. Hambrecht & Quist Capital Management, Inc. (HQCM), investment advisor to both H&Q Life Sciences (HQL) and H&Q Healthcare Investors (HQH) announced today that the Board of Trustees of each Fund has appointed Dr. Daniel Omstead as President, Alan Carr as President Emeritus and Jennifer Morris as Secretary.

Dr. Omstead, President and CEO of HQCM, succeeds Mr. Carr as President of each fund. Dan has a Ph.D. in Chemical Engineering and Applied Chemistry from Columbia University. He has extensive senior management experience with large pharmaceutical companies including both Merck and Johnson & Johnson.

Mr. Carr will continue to be an active advisor to Dr, Omstead concerning the fund’s investments. He has extensive experience with investing both in the public and venture capital markets.

HQH and HQL are NYSE listed closed-end funds that invest in healthcare & life science industries. For more information on the funds, visit

Source: Hambrecht & Quist

H&Q Funds Pay Dividends

Boston, October 1, 2001. On September 20, 2001, H&Q Life Sciences paid stock dividends of $0.57 per share. Seventy-four percent (74%) of the eligible shares opted to receive shares instead of cash. Since the Fund’s inception in 1992 the NAV has ranged from $9.98 to $44.80 (unadjusted for capital gains of $8.92) the market price per share has ranged from a high of $41.063 to $8.125. The stock has had a premium as high as 13.7% and a discount as wide as 29.9% over the period. It currently trades around a 20.2% discount.

On September 20, 2001 H&Q Life Sciences Investors paid a stock dividend of $0.66 per share. Of the eligible shares, over 68% opted to receive stock. Since the fund’s inception in 1987, the fund’s NAV has ranged from a high of $53.69 to a low of $6.16 (unadjusted for capital gains of $22.81) the market price has ranged from $4.375 to $40.00. The premium has been as high as 21.5% and the discount as wide as 30.9%. It currently trades around a 20.6% discount. CEFA holds shares in HQL and HQH. The H&Q dividends are in accordance with their 2% fixed distribution policy.

Source: H&Q Funds

Royce Value Trust (NYSE:RVT)

New York, September 30, 2001. Royce Value Trust paid a quarterly common stock distribution of $0.38 per share in either common stock or cash on September 24, 2001. RVT paid a cash dividend of $0.4875 per share on its 7.8% Cumulative Preferred and a cash dividend of $0.45625 per share on its 7.3% Tax-Advantage Cumulative Preferred Stock on September 24, 2001. The payment went to stockholders on record at the close of business on September 6, 2001 (ex-dividend September 4, 2001).

A portion of each distribution will be treated as long-term capital gains. The gains will be allocated pro-rata to all distributions for the year. The final determination of the source of all distributions in 2001 will be made by the end of the year. Royce’s primary objective is long-term capital appreciation, which it seeks by normally investing more than 75% of its assets in equity security of small-cap companies. RVT reports daily NAVs. For more information, call (800) 221-4268 or e-mail

You can visit them online at The Royce Funds will be a featured interview in the November edition of The Scott Letter Online.

Source: Royce Funds

Municipal Closed-End Funds and Interest Rate Risk

September 24, 2001. We expected the prices of municipal CEFs to perform well and for the funds to be in a safe haven when the market reopened after the terrorist attacks on Sept 11th. However, by the end of last week, mini-CEFs discounts had widened significantly. We think closed-end fund investors have over-reacted (as they sometimes do) and we expect discounts among municipal CEFs to narrow over the next few days or weeks. In the longer term, however, we think the outlook for municipal CEFs is mixed when long-term interest rates rise and credit quality may be in doubt.

Almost 90% of the 228 municipal CEFs leverage their assets. They raise additional assets by issuing very short-term (7-28 day) preferred stock and invest those assets in at higher, long-term rates. Consequently, short-term rates play a role in the performance of leveraged municipal CEFs. Changes in short term rates affect their dividend in particular.

Source: First Union Securities.

Year-To-Date Top Performers

Two of the top ten performing CEFs YTD (of interest to CEFA) by NAV/Market return (as of 10/15/01): First Financial Fund (FF) +18.83/+26.46% and Renaissance Capital (RENN), have an YTD return of +17.04%/+33.04%.

Source: Wiesenberger

Industry Statistics (as of October 16, 2001)

Total Number of Closed-End Funds (United States)582
Total Assets* ($ million)$123,370.37
*Assets are Net Assets, expressed in millions, and excluded leveraged capital.

Source: Closed-End Fund Association (

Commentary from Closed-End Fund Advisors:
Rebuilding our Economy

October 2001 is a month that reminds current investors of other dramatic declines, either the beginning of a recovery or false bullishness. It is the belief of the author that we have pretty much hit bottom. The economy was already sluggish and slow. Then we had quite possibly the most significant and horrible event in recent times.

If the economy was weak before the September 11th, how will it fair now? This is the question that many Americans have been wondering since the tragedy. Greenspan announced on October 2nd that the Fed would cut interest rates even more to an amazing 2.5% that is the lowest rate since 1962. Most of the economic data that is currently coming out is pre-crash. To know for certain what the economy is doing we will have to wait till later in the year.

To put the current market into context, the average U.S. stock fell 19.7% for the third quarter. This is the biggest drop since the fourth quarter of 1987. The S&P 500 fell around 15%, its largest drop since 1987 as well. The amount of wealth that has been destroyed is tremendous. For example, the $28 billion Janus Fund, which is about the size of the total mutual fund industry from 1974, is down -36.6% YTD and -57% from its Spring 2000 high.

In the current market environment why is the closed-end structure better for investors? One answer is simple, fixed capitalization. Tom Dinsmore covered this topic briefly in our last Scott Letter, but we wanted to make sure that our readers understood exactly why this is such a current advantage. No matter what happens, a closed-end manager never has to raise cash for redemptions. If everyone wanted to sell a certain CEF, then the market price would plummet. However, the NAV would only be affected negatively by changes to the holdings. In this case the discount would widen severely, creating an opportunity for value oriented investors to buy.

The U.S. economy may have been knocked down, but it will not be knocked out. There may be areas of weakness in the economy and it will most likely contract for a while. Stock markets always anticipate recoveries. This explains the current strength, which is expected to continue. Retail sales numbers are beginning to return to normal. We can expect a short and minor recession over early next year.

How can we as a country get our economy going? The answer is rather simple: go out and buy the goods and services that you need to buy. That is a simple way to get our economy rolling again. Investors should also add new money into their investment portfolios, taking advantage of the bargains available. Now is a great bargain opportunity in both the CEF industry and the common equity market. All you need to understand to justify investing in the stock market is that the United States’ economy works and will continue to work. As we have been telling many of our clients, earnings and not people’s perceptions drive the equity markets. Buy good companies; for they will lead the way into the next Bull Market.

If you have any questions about your current portfolio, would like to discuss our market views more thoroughly, or want a second opinion on future investments, please do not hesitate to contact us.



Tel: (800) 356-3508

October 17, 2001

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