June 2002, Volume II, Issue 6
George Cole Scott, Editor

Investors Are Ignoring The Good News

The current mood of investors is dismal. According to a recent report in Business Week, "the news on the economy — and its forward-looking implications for continuing growth and rebounding profits--has been uniformly excellent. Investors seemed more concerned about the corporate soap opera at the conglomerate Tyco than the reality of the good news about the economy. What's out of whack here is that investors seem to have forgotten that stock prices embody economic prospects, a fact that traditionally has made then a foreshadowing indicator of the economy. Right now, investors are behaving as if there were no recovery and an upturn in profits is nowhere on the radar screen &emdash; even while the evidence to the contrary is smack in their faces."

Consider the data: in May, consumer confidence rose to record levels, not seen since the recession officially began (if it really was a recession). Car sales, while down from April, are running slightly ahead of their first quarter pace, mortgage applications hit a record in late May and consumer demand is invigorating the industrial sector and more data indicates that a new boom is about to start.

Talk of a dollar "crash" is overblown. According to the June 7 Kiplinger Letter, the value of the greenback climbed over 50% in the past seven years. The recent doomsayers' predictions of a 30% drop in the dollar and an accompanying big flight from U.S. securities just aren't in the cards. The dollar decline will actually help exports, despite another widening of the trade deficit by boosting exports, global markets will recover lifting profits of U.S. multinationals as those earnings are translated back into dollars. Heightened inflation will only come into play if the decline were rapid and sizeable, reflecting a crumbling faith in the U.S. economy, which seems unlikely.

Indeed, the recovery is on increasingly solid ground as the gains in industrial activity rose from 53.9% in April to 55.7% in May. Other indicators are positive as well. "Growth will be slow, to be sure, but there is no contraction ahead," says Kiplinger. So, what's the beef?

Fed Chairman Alan Greenspan is clear on the productivity-driven improvement in both profits and consumer buying power as a key force in the economic recovery. He told the International Monetary Fund conference on June 4 that "something fundamental is going on in our system which has remarkably improved the underlying productivity growth in our economy, and that is going to be a materially positive factor for growth." Meanwhile federal spending on agriculture, defense, law enforcement, and intelligence plus other government programs will keep the economy moving forward, as much as 8% this year, according to Kiplinger.

Diversification Among Funds Helps Reduce Risk

The same principle of diversifying your portfolio by using mutual or closed-end funds applies to the use of a diversification of different funds, and, in our scenario, to diversify into different countries as well. With the possibility of a third down year for the U.S. Markets—the first since the 19 30s,    many advisors say that investors should “hang in there”. Many investors are scaling back their portfolios because of a confluence of negative factors — sluggish earnings, weak outlooks, a slow economic recovery, questionable corporate accounting and international conflicts. Christi Gebhart, a financial planner, says it helps to have an investment plan and to stick to it. We couldn’t agree more. “Historically, the (U.S.) market has outperformed for every 20-year rolling period,” Gebhart said.  These historic returns may offer little solace to investors worried about their portfolios right now. It is hard to ignore that many categories of funds are suffering, and it’s getting harder to find winners to offset losers. That is why so many professionals urge investors to have diverse portfolios.

“If an investor is properly allocated, there is nothing about this market that should give people a sense of fear, “ said Paul Merriman, President of Merriman Asset Management in Seattle.

An investor should have diversified fund holdings, in terms of company size, strategy and he should really think hard about buying international stock and bond funds recommended by a good financial advisor.

The theory is that by being exposed to different sectors, your chances are greater during bearish markets that you’ll collect some winnings, or at least not lose as much money.

There is evidence that diversification among funds works. Of the 42 fund categories tracked by Lipper, Inc., about one in four has a positive two-year annualized return despite the technology collapse and economic slowdown. This means you can mitigate some of the damage in the broader markets.

Investors in closed-end funds have been treading cautiously lately, as the international markets are still feeling the geo-political tensions in India, Pakistan and the violence in the Middle East. In spite of this, the closed-end country fund market has fared better than the overall markets lately, particularly those in Asia with the average discounts widening slightly to about 9.73%. For about a month now, the Japanese market is the top performing country as the Japanese auto makers reported increases in domestic production. The other top performing market in May was South Africa on rumors that South Africa's reserve bank is close to a deal with Deutsch Bank. A deal worth an estimated $100 million would be positive for the country's foreign reserves. The list of closed-end country funds showing strength lately includes Indonesia Fund and the Thai   Fund, as Thailand raised its 2002 economic growth forecast and announced fiscal stimulus measures. The Spain Fund was also a top performer as its lower house passed a bill giving the Spanish supreme court the power to ban political parties if they “deteriorate or destroy the system of freedoms or eliminate the democratic system”.

Russia Says Capital Flight Is Reversing

Moscow, June 25. Two senior Russian government officials said today that more money was now flowing into Russia than out, suggesting that Russians were bringing some of their “flight capital “ back home to spend or invest after years of stashing it overseas, according to a report in The New York Times. The finance minister, Aleksei Kudrin, and the governor of the central bank, Sergei Ignatiev, said that for the first time since such statistics have been kept, Russia would have a surplus in its capital account in the second quarter of 2002, meaning a net flow of capital into the country.

“It is the new reality of Russia,” Mr. Kudrin said today at an investors conference in Moscow. “It means that there is confidence in the government’s policies. We must support this confidence with real results in the investment climate.”

Japan’s Stock Market

The Nikkei is up 11% this year, more than any other stock index. Corporate Japan forecasts a 51% jump in profits, for the year ending next March. The first quarter grew at a 7.7% annual clip. Exports to the U.S. and elsewhere have rebounded, and household spending has increased. The yen is strong: for example, during a two week period in mid-May, overseas investors steered $8 billion into the Tokyo Stock Exchange. It may not be all rosy, however. Japan's unreliable economic statistics probably overstated first quarter growth, according to Business Week. Second, the drop in the dollar could deep-six the modest recovery that actually is happening. In any event, Japan's long-running bank mess will keep a lid on the economy until it finally gets resolved. Our interest is not in investing yet in Japan, but in the effect of its recovery on the region, where we have been adding to our portfolios with funds in Hong Kong and other parts of SE Asia which are dependent on the Japanese economy to accelerate their growth.

REIT Fund Performance Summary
by John Cole Scott

	YTD	1 Month	3 Month	1 Year	3 Year Average	5 Year Average
Open-End REIT Fund	8.89%	0.53%	8.63%	16.52%	12.79%	8.53%
Open-End REIT Index Fund	8.64%	0.58%	8.71%	20.05%	11.94%	8.68%
Closed-End REIT Fund	10.58%	0.81%	9.03%	17.88%	13.69%	9.80%
Exchange-Traded REIT Fund	8.23%	0.29%	8.46%	18.41%	N/A	N/A
NAREIT Index	9.74%	1.31%	9.32%	33.77%	16.19%	9.97%
Data is as of 4/30/02 from Wiesenberger Fund database and is compiled by John Cole Scott.

	1-Year Beta	R- Squared	Sharp Ratio	Treynor Ratio	Prm/ Disc	Expense Ratio	1-Year Std. Dev.	Average Net Assets ($)
Open-End REIT Fund	0.34	21	1.24	3.21	N/A		11.16	809.15M
Open-End REIT Index Fund	0.32	18	1.50	4.18	N/A	1.24	11.38	790.7M
Closed-End REIT Fund	0.33	22	1.39	3.51	2.58	0.66	10.80	237.85
Exchange-Traded REIT Fund	0.34	18	1.28	3.60	0.02	1.29	12.17	37.95M
NAREIT Index						0.48	7.68
Data is as of 4/30/02 from Wiesenberger Fund database and is compiled by John Cole Scott.

Notes:
	NAREIT stands for "The National Association of Real Estate Investment Trusts Total Return Index". It includes all 211 REITs currently trading on the NYSE, NASDAQ and the AMEX. It has been included for comparison purposes.
	Funds used for open-end REIT fund comparison were Cohen & Steers: CSEIX & CSRSX.
	Funds used for open-end REIT Index comparison were Vanguard: VGSIX & Wells S&P: WSPAX. Cohen & Steers does not have any open-end REIT index funds to compare.
	Funds used for closed-end REIT fund comparison were Cohen & Steers: RFI & RLF
	Funds used for exchange-traded REIT fund comparison were iShares, Cohen & Steers: ICF & iShares, Dow Jones: IYR.
	Cohen & Steers funds were chosen because they have funds in three out of four categories.
	Two funds were chosen out of each category to help validate data.
	There are currently 60 open-end REIT funds, two open-end REIT index funds, four closed-end REIT funds and three exchange–traded REIT funds.

There are four basic types of REIT funds investors can chose from.

Open-End Active Management: By far the largest category with 60+ funds. If you are looking for niche REIT funds, you are more likely to find a fund in this category because it is so much larger than the other three categories.

Open-End Index: Only two funds are included; neither are those managed by Cohen & Steers. This made my comparison a little weaker, but they were the only available funds of this structure.

Closed-End Active Management: This category outperformed the other categories in all but the 1-year return. It also had the lowest 1-year standard deviation. There are three Cohen & Steers closed-end REIT funds and a recent Nuveen offering.

Exchange-Traded REIT Funds: a closed-end REIT index fund. There are three REIT ETFs. Two iShares, one managed by Cohen & Steers and one using the Dow Jones name. There is also a streetTracks Wilshire REIT ETF.

The closed-end structure has led to better performance numbers. This is not to say that any of the 60+ open-end REIT funds outperformed the closed-end REIT funds. They could accomplish this feat simply by random chance. The comparison I made was in regards to one style, one set of managers. There are nine open-end REIT funds that have outperformed RFI (CEF REIT Fund has been around since 1993) with a better 5-year average return. Of those, only four funds have a better 3-year record. There are 36 open-end funds that have been around 5 years, and only one closed-end or ETF REIT fund has been around that long.

When buying these funds, we suggest you use limit or stop orders. This protects your investment on the downside. By avoiding redemption pressures, you allow the investor to focus on his investments and the fund manager to focus on investment decisions. With a ratio of 32:1, Cohen & Steers' closed-end RFI has been a great investment for people looking to diversify into REITs and who want the benefits of active management and the fixed capitalization of a closed-end fund.

Manager Backgrounds

Cohen & Steers Capital Management is the only management company that has closed-end, open-end and exchange-traded REIT funds. The two principals, Martin Cohen, President, and Robert Steers, Chairman, have a tremendous amount of experience in the real estate investment markets.

Cohen is president of Cohen & Steers Capital Management, a registered investment advisor based in New York City. Established in 1986, the firm is the nation’s leading manager of real estate securities portfolios on behalf of institutional investors as well as a family of real estate mutual funds. The mutual funds managed by Cohen & Steers include Cohen & Steers Realty Shares, the nation’s largest open-end real estate mutual fund.

Mr. Cohen is considered to be one of the nation’s leading experts in real estate securities investment.  In 1985, while a senior vice president at National Securities and Research Corporation, he and Robert Steers organized and managed the nation’s first real estate securities mutual fund. He has authored many published articles and lectures on the subject of investing in real estate securities. In 2001, he was the recipient of the National Association of Real Estate Investment Trust’s Industry Achievement Award. Mr. Cohen received a Bachelor of Science degree from the City College of New York and his MBA from New York University.

Robert Steers is Chairman of Cohen & Steers Capital Management. The mutual funds managed by Cohen & Steers include Cohen & Steers Advantage Income Realty Fund, Inc. and Cohen & Steers Total Return Realty Fund, Inc., both of which are closed-end funds. In 1997, the firm introduced two new open-end funds: Cohen & Steers Special Equity Fund and Cohen & Steers Equity Income Fund. From 1984 to 1986, Mr. Steers was a Senior Vice President and Chief Investment Officer of National Securities and Research Corporation where he chaired both the Investment Policy and Stock Selection Committees. From 1977 to 1982, Mr. Steers served as a securities analyst and Vice President/Portfolio Manager of Citibank’s Emerging Growth Stock Fund. Mr. Steers holds a B.S. degree from Georgetown University and MBA degree from George Washington University.

Allied Capital Reports

Washington, D.C., June 12, 2002. Allied Capital (NYSE:ALD) today announced that it has filed an amended Form 10-Q for the quarter ended March 31, 2002 to include the review report of the company's newly appointed auditors, KPMG LLP. There have been no changes to the previously reported financial results of the company for the quarter ended March 31, 2002, which were prepared in accordance with generally accepted accounting principles.

Bill Walton, Chairman and CEO, remarked, "As a result of the recent misinformation circulating in the market regarding our company's accounting practices, we thought it would be prudent to have our new auditors provide a review report with respect to our most recently published interim financials. KPMG had already performed a timely quarterly review in conjunction with the filing of our first quarter financial results; however, at the time we did not request a written report. I believe this written report will put all these questions to rest.”

In addition to including KPMG's review report, the amended Form 10-Q has been updated to inform shareholders about the strike suits that have been filed against the company. In its disclosures in the amended Form 10-Q, the company reiterates that the purported suits are without merit, and the company will vigorously defend itself in these matters. The filing may be obtained by visiting the company's web site at www.alliedcapital.com.

Allied Capital is the nation's largest business development company and provides long-term investment capital to support the expansion of growing middle market companies. The company provides mezzanine debt and equity financing, and also participates in the real estate capital markets as an investor in commercial mortgage-backed securities. The company is headquartered in Washington, D.C.

[Business Development Companies, which also include Renaissance Capital, are cousins of closed-end funds as they have a similar structure but differ as their managements become much more involved in the companies in which they invest. Allied Capital is allowed to loan money to their portfolio companies, which is forbidden for closed-end funds. &endssh Edtior

Star Scientific Approves Stock Buy-Back Plan

Chester, Virginia, May 31, 2002. Star Scientific, Inc., (STSI-NASDAQ)   a technology-oriented tobacco company with a toxin reduction mission, announced that its Board of  Directors today approved the establishment of a stock purchase plan pursuant to which it may purchase shares of its common stock over the next year. Under the plan, the company may acquire up to 1,200,000 shares of common stock in the open market and negotiated purchases, from time to time as conditions warrant, at prices the company deems appropriate. Star Scientific currently has approximately 60 million shares outstanding. The company is one of the few individual stock holdings held by clients and principals of Closed-End Fund Advisors, Inc.

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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