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

November 2003, Volume III, Issue 9
George Cole Scott, Editor

Research Raises New Fears on Mutual Funds

“Improper trading in mutual fund shares is more widespread than feared, according to figures that show at least one in four international mutual funds had levels high enough to indicate improper activity.

The funds had churn rates – levels of sales and redemptions as a percentage of assets – more than four times the industry average, representing a level almost impossible to achieve without improper trading.

Of 126 funds, 29 had churn rates of more than 100% last year, according to investment research company Lipper, suggesting short-term arbitrageurs — or “market timers” — were at work.

People close to the Securities and Exchange Commission said that half of the 88 fund managers and brokers the SEC had contacted revealed timing arrangements with some clients.

The probe into improper trading in mutual fund shares launched by Eliot Spitzer, New York attorney general, is the biggest scandal to hit the fund industry in more than 60 years and has tarnished its clean image. It appears many funds have been willing to tolerate or support arbitrageurs siphoning off billions of dollars in short-term profits at the expense of long-term investors

Source: Financial Times

“Fund Scandals May Aid Rival Plays” —
ETFs, Managed Accounts Could Gain New Investors,
But They Aren’t for Everyone
by Kaja Whitehouse, Dow Jones Newswires

As the mutual-fund industry squirms under growing allegations of wrongdoing, providers of exchange-traded funds and separately managed accounts may be cheering in the background. Replacing funds implicated in recent scandals with funds that haven’t been involved may not be a popular strategy, because in is unclear which funds will be next to be named by regulators. Although numbers aren’t yet available, fund watchers say that some wealthy and tax-savvy individuals already are turning to alternative investments.

Exchange-traded funds are baskets of securities that trade like stocks. Separately managed accounts are customized portfolios overseen by professional money managers.

"It’s unlikely that ETFs and SMAs will ever totally replace mutual funds,” says Cindy Zarker, a senior analyst with Boston research firm Cerulli & Associates. She notes that not all funds will be tarnished by the scandal and says that those that remain unscathed will attract assets. Both SMAs and ETFs have been gaining market share in recent years. ETFs grew to $119.7 billion in assets in September 2003, compared with assets of $63.5 billion in 2000, according to data from the Investment Company Institute, the mutual fund industry’s largest trade group. Meanwhile, separately managed accounts have grown to $456 billion in assets compared with $417 billion in 2000, according to Money Management Institute, a research firm basedin Washington, D.C. Mutual fund assets total about $7 trillion, although there have been outflows in recent weeks from the funds implicated in the scandal”.

A Securities and Exchange Commission official said that after sending out 88 letters to mutual fund companies and brokerage firms, it found that half of the fund companies had arrangements with one or more investors allowing them to trade in and out of shares.

The Closed-End Fund Association's Closed-End Fund Center
by Douglas G. Ober, Chairman, Adams Express Company and Petroleum & Resources Corporation

In recent days, a number of mutual fund complexes have faced troubling allegations including facilitating illegal late trading by certain investors; permitting market timing trading when the fund prospectus prohibits the practice; paying brokers in exchange for preferential treatment of their funds; and paying hidden compensation at shareholder cost. Closed-end fund shareholders have rightfully asked if such abuses have occurred in closed–end funds, too.

The answer is a resounding NO. Closed-end funds are not implicated in the investigation. The way that our shares are traded precludes the type of market timing and late trading practices that have been uncovered. Whereas mutual funds are priced at net asset value once daily, closed-end shares are publicly traded on a stock exchange, continuously priced at market. The feature of the closed-end fund structure prevents the favored treatment of some shareholders over others.

If any investor wants to do short-term trading in closed-end funds, he does so at real-time prices and does no more harm than someone who short-term trades GE, Microsoft or another security. Sales activity in closed-end funds has a hard deadline — closed-end funds are bought and sold in open market transactions and a purchase or sale is priced in real time and instantaneously — and the trading does not cause an inflow or outflow of assets from the fund. There is no rapid movement of assets in and out of the funds from the trading in a closed-end fund’s shares.

The second question concerns the way funds disclose fees to their shareholders. Closed-end funds carry an annual expense ratio that reflects all-in fund administrative costs and is reported in the fund’s annual report. Fund expense rations and other relevant metrics for many funds are also carried on web sites including this one (, Morningstar and the fund’s own site. In addition, closed-end funds are purchased on an exchange, and the usual transaction costs to buy or sell the security apply.

Shareholders should know and understand the cost of various fund investments they own — investment costs do matter. Even a difference of one-fourth of 1% (or 25 basis points, to the initiated) can make a big difference. A couple that invested their $100,000 retirement nestegg for ten years and received an 8% annual return would receive an increase of almost $6,000 if their advisory fees were reduced by 25 basis points, according to testimony.

Some investment professionals have come to believe that closed-end funds are stogy and out of favor. It is our belief there are advantages to both closed-end and open-end structures and a place for each in investors’ portfolios. Closed-end funds are an effective, cost efficient way to outsource the professional management of a portfolio of securities and achieve diversification. And closed-end funds permit shareholders to benefit from a wide range of investment styles for domestic and international equities and bonds.

We are proud of the history of the investment company industry and of closed-end funds; and are committed to upholding the interests of our long-term shareholders. We welcome your questions or opinions in response to

The Global Economy Set to Undergo a Moderate Recovery
by James Libera

The global economy is on track to undergo a moderate recovery in 2004, with worldwide GDP growth of 3.5%. The U.S. and China are the main engines of growth. Global central banks will need to raise interest rates in 2004, but before that a “sweet spot” will be in force. Rising economic growth combined with low interest rates and low production costs allow top-line revenues to flow to bottom line profits. We are already seeing evidence of this phenomenon in the U.S., and it should become visible globally as well. Equity markets are discounting the improving fundamentals. Developed markets are up 20% so far this year and emerging markets are up 40%. We think the equity rallies can continue for some time, although some valuations are extended ....

Central European economies are struggling with high budget deficits but rising growth in 2004 will ameliorate this problem. The May 2004 accession to the European Union is bringing a renewed wave of portfolio and direct investment into the region. Convergence with Western Europe will continue to mean rapid growth. Equity markets have risen sharply and are no longer cheap. However, growth combined with declining risk keeps this a “buy” ....

Asia-Pacific economies will remain the world’s fastest growth area through 2004. China is increasingly dominant in the region, but other Asian countries are finally viewing China less a threat and more an opportunity as a huge and voracious market for their exports. To some extent, this insulates the region from dependence on the developed economy cycle, which has been less than supportive lately.  The region’s equity markets have risen moderately this year, and we think most can move higher over the next six months ....

Latin American markets continue to surge because of improving political/economic outlooks in the region. Mexico has been an exception and has disappointed those who expected faster growth and reform under President Fox. U.S. recovery in 2004 should raise Latin American GDP growth from its anemic levels to about 4%. Valuations remain inexpensive, and we recommend riding the rally ....

James Libera writes the monthly publication, Closed-End Country Fund Report in Washington, where he is editor-in-chief and publisher. For more information, he may be contacted at

Is China’s Economy Overheating?

Yes. There are ominous signs, reminiscent of Japan just before it fell into its long slump: Credit creation in China has been exploding, especially in the past year. Property prices are surging, hiking the odds of an asset bubble bursting. Excess capacity threatens many industries, despite strong export growth.

But Beijing will tackle the problem before it gets out of hand. Officials already are forcing banks to slow down their rampant lending. That will have the added benefit of averting future non-performing loans, which are already a serious threat to China’s rickety banking system. Meanwhile, China will continue to grow at a phenomenal clip. Barring a fresh SARS epidemic, GDP will rise 8.2% this year and 8% next.

“The (U.S.) economy will slow but not stall after posting a blustering third quarter gain. A deceleration to 4.5% GDP growth this quarter and 3.5% in the first quarter 2004 may raise fears that we’re heading into another false recovery (something the U.S. suffered twice in 2002). It’s only a shift to steadier expansion following two years of stop and start growth”

Source: The Kiplinger Letter, October 24 and November 7, 2003

Central & Eastern Europe:
Investment Flows into Region at Record Levels

“Five years ago, the Russian financial crisis cast a long shadow over central and eastern Europe and the former Soviet Union. Today, it is a distant memory, obscured by the rapid progress made by almost the whole region since 1998, not least by Russia itself, according to a report in The Financial Times.

Despite the war in Iraq, the gyrations in world capital markets and the post-2000 global economic slowdown, the former communist countries are posting bigger increases in economic growth than many expected.

Leading the way is Russia, the region’s largest economy, which is this year forecast to grow by over 6%. The region as a whole is forecast to post growth of gross domestic product of nearly 5% in 2003, with a similar increase expected next year.

Despite the air of caution hanging over the world economy, foreign direct investment into the 27 states of the former Communist bloc is flowing close to record levels, with the European Bank for Reconstruction and Development (ERBD), the region’s multilateral bank, forecasting a total for this year close to the $28 billion achieved last year.”

Source: The Financial Times

Convertibles Poised for Growth?
Big Institutional Investors Giving Bonds a Closer Look,
Lured by Low Interest Rates
by Liz Rappaport, Dow Jones Newswires

The junk-bond market graduated to adulthood in the 1990s, when pension funds, insurance companies and endowments recognized it as a separate investment category.

Now, bankers are hoping the same will happen to the convertible-bond market, which hasn’t drawn as much participation from these large institutional investors. There are signs that some of these investors are considering dedicating specific segments of their investment pools to convertible bonds. That could spur the market’s growth by creating demand for types of convertibles better suited to the needs of long-term investors.

Convertibles are hybrid securities, which poses problems for some investors. It makes both accounting and valuation of the securities more complex. Like any debt securities, convertibles pay a regular coupon. But unlike regular bonds, when the issuer’s stock price reaches a certain level, the convertibles can be exchanged for shares at a preset ratio. That gives the investor an exposure to the equities market. Convertibles also come with options that allow investors to sell the convertible back to the issuer at a given time. Issuance of convertibles has gained in breadth and depth in the past five years, and this year, convertibles have put in stellar performance. The U.S. Lehman Brothers Composite Convertible Index is up 18.02% year to date, and the market has grown to $285 billion at the end of September. By comparison, the U.S. junk or “high yield” market has a $500 billion market capitalization.

The broadening base of convertible issuers, which this year expanded to include larger, investment-grade companies doing $1 billion-plus deals, will also boost convertible’ acceptance among pensions, insurers and endowments”, said David Hammerstein, chief strategist at Yanni Partners, an institutional-investment consulting firm.

Currently, low interest rates are driving these investors toward convertibles,” he added “Strait bonds look less attractive, as yield margins have narrowed sharply during the current rally, and the relatively lower rate of steady income provided by convertibles is off set by the possibility of equity upside,” Mr. Hammerstein said.

Fund and REIT News

The Board of Directors of The Adams Express Company (ADX:NYSE) declared the following year-end income dividend and capital gains distribution, payable December 27, 2003 to shareholders of record as of November 24, 2003: $0.05 per share, representing the undistributed net income for the year 2003; and $0.58 per share, representing the undistributed net capital gain realized during the year 2003, of which $0.54 was long-term and $0.04 was short-term. Distributions in 2003 made prior to today’s announcement were $0.15 per share, consisting of $0.12 from investment income and $0.03 from long-term capital gain, for total distributions for the year of $0.78. For more information, contact or 800-638-2479.

Central Securities Corporation (CET-ASE) has declared the following dividend on its common stock: One share of common stock for every 15 shares held, the value of shares will be issued at $19.30 per share or $1.28 in cash per common share held. The dividend is payable December 29, 2003 to shareholders of record November 14, 2003. The cut-off date for election of cash in the Optional Distribution is December 1, 2003. If no response is made, shares will be issued. Cash will be paid in lieu of fractions based on the value of $19.20 per share of common stock issued. It is estimated that of the $1.28 per share to be paid, $0.10 will be taxable as ordinary income and $1.18 will be taxable as long-term taxable capital gain.

The Scott Letter recommends shareholders take the dividend in shares because of the difference between the distribution price and the stock price. The shares closed at $19.71 per share on November 19, 2003.

Cohen & Steers is on the hunt for an asset manager to subadvise a portfolio of utilities and real estate holdings for a closed-end fund schedule to launch in January, according to an insider. Cohen & Steers will offer a combined portfolio consisting of real estate and utilities securities—two asset types known for stable dividend payments—but no final determinations have been made, the insider said. Cohen & Steers intends to keep the fund’s real estate management, the firm’s specialty, under proprietary management. Also, Cohen and Steers has not yet teamed-up with a broker/dealer to bring the fund to market. Cohen & Steers has launched four leveraged closed-end funds during the past year.

Ellsworth Convertible Growth and Income Fund, Inc. (ECF-ASE) has declared its sixty-ninth quarterly dividend, $0.10 per share from ordinary income, payable November 26, 2003, record date October 30, 2003. Shareholders who are not members of the Company’s Automatic Dividend Investment Plan will be given the option to receive the dividend either in cash or in shares of common stock of the company. Because of this option, the dividend is taxable to all shareholders whether or not they choose to receive cash.

Ellsworth Convertible Growth and Income Fund is also offering to its common stockholders of record as of October 14, 2003 non-transferable rights which allow shareholders to subscribe for one share of the Fund’s Common Stock for each right held. The subscription price will be the lesser of 95% of (a) the net asset value per share of the Fund’s common stock on November 20, 2003, or (b) the average of the volume weighted average sales price of a share of the Fund’s common stock on the AMEX on the pricing date and the four preceding trading days. The estimated Subscription price is $7.76 per share.

Ellsworth is a diversified closed-end management investment company. Ellsworth’s investment objective is to seek a high level of total return on its assets through a combination of current income and capital appreciation by investing primarily in convertible securities. We will feature an interview with Tom Dinsmore, President of Ellsworth Convertible Growth and Income Fund, in the December Scott Letter.

The Board of General American Investors Company, Inc. (NYSE: GAM) declared the following dividends on the common stock for 2003: A capital gain dividend of $.49239 per share from net long-term profit on securities sold during the period January 1, 2003 through October 31 2003. This compares to a capital gain dividend of $.298 per share for the period of January 1, 2002 through October 31. 2002.

An income dividend of $.00761 per share representing the distribution for the full year 2003 from estimated undistributed income. This compares with an income dividend of $.022 per share for 2002.Both dividends are payable on December 23, 2003 to stockholders of record Nov. 14, 2003.

A “spillover” dividend for General American Investors shareholders is usually declared for the fourth quarter of each year and is paid in March.  The net asset value of the common stock of General American Investors on October 31, 2003 was $32.09 per share. The closing price of the common stock on October 31, 2003 was $28.95 per share.

For additional information, call 212-916-8420 or visiit

Renaissance Capital Growth & Income Fund 111 (NASDAQ-RENN), has announced that the Board of Directors has approved a distribution of $.10 per share. The dividend will be payable on December 1, 2003, to shareholders of record as of November 17, 2003. With this dividend, the Fund will have paid $8.06 per share in cash distributions, since inception. The Fund reports a net asset value per share of $14.76 per share for the quarter ended September 30, 2003, up from $11.50 on June 30, 2003, a gain of 28% for the quarter.

Renaissance Capital Growth & Income Fund 111, Inc. is a business development company organized as a closed-end fund concentrating on investing in emerging growth companies, including investment in private placements of convertible securities. For additional information, please visit

For Investors Seeking High Returns,
REITs Prove the Right Route
by Julie Bennett, The Wall Street Journal

Analysts and investment bankers agree this may be the perfect time for individual investors to get their toes wet in the REIT (Real Estate Investment Trust) market. But they disagree over which REIT pool to enter first.

REITs are having a phenomenal year. In a time when bond returns average 4%, interest rates are 2% or less, and stock returns are mixed, the National Association of Real Estate Investment Trusts (Nareit) in Washington reports that the nation’s 171 publicly traded REITs recorded an astonishing 27.8% total return through late October from the same period in 2002. The group’s market capitalization, which was only $9 billion in 1990, has reached $200 billion. And Ibbotson Associates, a Chicago-based investment research company, recently issued a report stating that REITs should be a “core asset” in most investment portfolios”.

Editor’s Note: Closed-End Fund Advisors uses REITs as part of its asset allocation for its clients.

Pan Pacific Retail Properties, Inc. (NYSE-PNP), is an equity real estate investment trust and the largest neighborhood shopping center REIT focused exclusively on the West Coast. On November 4, PNP reported its Board of Directors declared the regular quarterly dividend of $0.51 per share, payable on December 15, 2003 to stockholders of record on November 28, 2003. The quarterly dividend of $0.51 per share is equivalent to $2.04 per share on an annualized basis.

Pan Pacific Retail Properties is one of the largest holdings of Closed-end Fund Advisors.

Another Look at Benchmarks:
Are They a Misleading Indicator?
by Antony M. Maramarco

As the old story goes, the veteran investment counselor tells a newly-minted portfolio manager: “Managing money is easy. There are only two rules to remember. Rule #1: Don’t lose your clients’ money. And Rule #2: Don’t forget Rule #1.

Of course, managing money is anything but easy. But for a certain group of investors, Rule #1 &emdash; not losing money in absolute terms, or put more positively, preserving capital &emdash; is a major and perhaps sole concern. Such investors would be satisfied knowing their cash sits idly in an insured account at the bank earning whatever the minuscule amount of interest currently offered.

Another group of investors closely related to “capital preservers” also seeks to avoid losing money, but, in addition, ensure that the purchasing power of their assets keeps pace with inflation. Recent innovations such as “I bonds,” U.S. Treasury securities that offer a fixed rate of return based on the Consumer Price Index, were designed to help these investors achieve those objectives.

Then there are investors, usually with fairly large portfolios, who desire returns in excess of inflation but expect to achieve such results through portfolio diversification… and, as sophisticated investors know, no investment style stays in favor forever.

A proven recipe for long-term success is to invest across a spectrum of asset types (stocks, bonds, real estate, etc.) and, at least for equity investment, across styles (growth and value) and capitalization sizes (large-, mid-, and small cap). An equity portfolio equally weighted among the four styles would have handily produced returns well in excess of inflation over the twenty-year period illustrated ....

"At any level of financial sophistication, investors should compare the performance of individual asset classes in their portfolios to an appropriate measuring stick, or benchmark. The investor with $50,000 under his mattress should know what insured money markets are yielding. The person with $5 million spread across a number asset categories not only knows how his entire portfolio is performing, but also how each part of it is doing versus an appropriate measure of performance." — The Babson Staff Letter, October 17, 2003.

Social Screens Up In Managed Accounts

There is a significant spike in the use of socially-screened portfolios in the managed accounts area. In The Social Investment Forum’s 2003 Report on Social-Responsible Investing Trends in the United States, the trade group found that socially screened managed accounts increased to $1.99 trillion in 2003 from $1.87 trillion in 2001. Assets generated from socially responsible mutual funds this year totaled $162 billion, the report noted. Both institutional and high-net-worth individual investors are taking advantage of these offering’s ability to customize their portfolio holdings, said Reggie Stanley, chief marketing officer and senior vice president at the Calvert Group Tim Smith, president of the Social Investment Forum, said that it makes sense for an institution or an individual who has at least $1-2 million in investable assets to sock away their money in managed accounts rather than multiple mutual funds which may entail more fees.

Find expression for a joy, and you will intensify its ecstasy.
— Ocscar Wilde (1854-1900), playwright and poet

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