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

September 2003, Volume III, Issue 7
George Cole Scott, Editor

RENN Net Asset Value Rises 38.4%, Announces Distribution

August 4, 2003, Dallas, Tx. Capital Growth & Income Fund 111, Inc. (RENN-NASDAQ) net asset value per share rose from $8.38 per share on March 31, 2003 to $11.60 on June 30, 2003, an increase of 38.4%.

RENN also announced that the Board of Directors of the fund has approved a distribution of $0.10 per share, payable on August 29, 2003 to shareholders of record as of August 15, 2003.

“We have been very pleased with the performance of the RENN portfolio over the past quarter,” said Russell Cleveland, President, “reflecting both a much better market climate and impressive results from many of our portfolio companies. Our fund is weighted with drug delivery and medical technology holdings.”

General American Investors Sets Share Buyback

July 9, 2003--The Board of Directors of General American Investors (GAM-NYSE) today authorized the repurchase of up to 500,000 outstanding shares of common stock when the shares are trading at a discount from the underlying net asset value of at least 8%. This continues a repurchase program, which began in March 1995. During the past 8¼ years, the Company repurchased almost 9.5 million shares of common stock for $246.3 million at an average discount of 12.2%. This year, the company repurchased 679,300 shares for approximately $16.2 million at an average discount of 9.3%.

Spencer Davidson, President and Chief Executive Officer, stated:“We expect the repurchase program to continue as long as long as we believe that it contributes to the enhancement of shareholder value.”

General American also announced that it will redeem on September 23, 2003, all of its 7.2% tax-advantaged cumulative preferred stock, series A, for a redemption price of $25 per share, plus accumulative and unpaid dividends through the redemption date. (Cusip #368802302. Trustee is Mellon Investor Services.)

General American Investors, founded in 1927, has an objective of long-term capital appreciation through investment in companies with above average growth potential. General American has net assets of approximately $900 million applicable to its 29.9 million shares of common stock outstanding.

Liberia Sees Attractive Valuations in Europe and
the Emerging Markets

“The rise in global equity prices during the first half of 2003 was driven by oversold conditions, attractive valuations (in Europe and the emerging markets), low interest rates and expansionary monetary policies”, says James Liberia, publisher of The Closed-End Country Fund Report.

“However, the reversal in bond yields over the last couple of months has caused global stock markets to waver. Valuations are less compelling than at the beginning of the year .... We expect central banks to remain accommodative. Much of the expanding liquidity should continue to find its way into equity markets…(and) global economic growth to slowly accelerate during the last quarter of 2003 and 2004”

“Central Europe is experiencing economic difficulties. Dependent on exports to a stagnating Western Europe, Central Europe will grow only about 3% in 2003. More worrying is the rise in budget deficits to an average 7% of GDP. However, we expect improved growth and deficit numbers in 2004. Accession to the European Union in May 2004 is still on track. Central Europe’s equity markets should do well in the lead-up to EU enlargement, and for years after, as the region plays economic catch-up.”

“Asia-Pacific economies represent the fastest growth area in the world. Regional GDP growth should approach 5% in 2003, rising to 6% in 2004. However, equity market returns this year have been comparatively modest, mainly in the 10-20% range. Equity markets are selling at average 15x 2003 earnings, inexpensive considering the growth prospects.”

“Latin America economic growth is dependent on an upturn in the U.S. economy. We project regional GDP growth of 2% in 2003, followed by 4% in 2004. Latin American equity markets have enjoyed significant gains this year, from 15% in Mexico to roughly 30% in Brazil and Chile and more than 60% in Argentina. Much of the strength has been a rebound from depressed levels, as the possibilities of economic crises in Argentina and Brazil have waned. Despite the gains, valuations are still moderate, and we recommend over-weight exposure here.”

James Libera currently holds the following funds in his “model portfolio”: Brazil Fund (BZF), Central European Equity (CEE), Chile Fund (CH), Europe Fund( EF), Japan iShares (EWJ), Jardine Fleming China Region Fund(JFC), Latin American Discovery Fund(LDF), Malaysia Fund(MF), Mexico Fund(MXF), MSDW Eastern Europe(RNE), Morgan Stanley India Inv. Fund(IIF), New Ireland Fund(IRL), ROC Taiwan Fund(ROC), Singapore iShares(EWS), Spain iShares(EWP), Turkish Investment Fund(TKF), and U.K. Shares(EWU).

Source: Liberia’s Closed-End Country Fund Report, August 2003

Risks of Investing Abroad

“Two of the main risks of investing abroad are currency risk and political risk. The currency risk of investing in non-dollar denominated securities is the risk that the relevant local currency will lose value relative to the U.S. Dollar. In other words, if a U.S. investor buys a security denominated in a foreign currency and the currency weakens relative to the U.S. Dollar (even though the value of the security in the local currency remains stable), the value of the security to the U.S. investor declines.

The Effect of Currency Risk on a Closed-end Fund:

The net asset value of a closed-end fund holding non-U.S. denominated securities will decline if the local currency weakens. Furthermore, if a closed-end fund is exposed to a foreign currency and that currency weakens, the fund may need to offset its income with currency losses, possibly resulting in a return of capital.

Political risk refers to the potential deterioration in a security’s value due to changes in a country’s political structure or policies, such as tax laws, expiration of assets, or restriction in repatriation of profits.

Source: Marianna Bush, CFA, Wachovia Securities

Health-Care REITS Still A Refuge

NEW YORK (Dow Jones). Health-care real estate investment trusts have been the antidote for queasy investors seeking safe havens during a stomach-turning economic environment. With much uncertainty still plaguing the U.S. economy, some investors believe the prescription remains effective.

Health-care REITS delivered returns of 26% in 2000, 52% in 2001, and 11% in 2002, according to the National Association of Real Estate Investment Trusts (NAREIT).  They’ve advanced another 23.3% so far in 2003, outpacing the Standard & Poor’s 500, which was up 12% as of August 20.

If the economy stays sluggish and employment remains flat, investors will likely continue to loiter in the sector. It doesn’t hurt what the REITS own – nursing homes, medical office buildings, hospitals and seniors’ residences – are expected to be more in demand as the nation’s Baby Boom population ages.

One portfolio manager moved into the sector because he expects “relatively stable cash flow” and attractive dividend yield. Many investors jumped into the group for its high dividend yield, low valuation, non-cyclical nature, and bullish outlook. Currently, health-care REITS boost a 7.6% dividend yield on average, according to NAREIT.

Legg Mason analyst Jerry Doctrow said the business fundamentals in the health-care REIT sector are sound and the dividend yield remains attractive. Even if the economy is rebounding now, he said, other real estate sectors, such as office and industrial properties tend to lag the overall economy in their recovery. As a result, healthcare REITS, with their stable growth and dividend yield, continue to remain attractive.

Bob Steers, co-portfolio manager at Cohen & Steers Capital Management Inc., is more bearish on the group. He sold-off many of his healthcare REIT shares at the beginning of 2003 in anticipation of an economic rebound. As the economy improves and interest rates tick-up, he said, he tends to seek out more growth-oriented REITS that will reap the benefits of an economic rebound.

“We have no doubt the economy has turned,” said Steers. And he tends to target “cyclical” REITS, whose earnings growth will blossom as the economy rebounds.

The Annual Report of Cohen & Steers Realty Shares, Inc. says:

As has been our outlook for the past year, we believe that economic growth will continue at a moderate pace over the coming quarters and well into 2004. With unprecedented fiscal and monetary stimulus already in the system, recently introduced additional stimulus, a weakening dollar and upcoming presidential election in 2004, this case has only grown stronger.

Currently, we face two misperceptions in our industry. The first is that REIT share prices are disconnected from real estate and REIT fundamentals. On the contrary, the previously noted REIT market decline in the second half of last year probably discounted currently weak fundamentals. We believe that REIT share prices remain connected with net asset values, which have been buoyed by the robust private market. Looking forward, the key to investment success in 2003 will be to accurately project the outlook for profit growth in 2004. Because real estate is an asset class that has considerable visibility, any profit recovery will be evident well in advance. In our opinion, the key factors are economic and job growth, and how they translate into improving health for real estate markets. Just as there was a collapse in demand for space in the past two years, we expect to see an improvement in occupancy rates, rental rates, and profits for just about every real estate sector of the REIT industry. If the economy responds as strongly as we expect, real estate fundamentals in some sectors may potentially recover as fast as they deteriorated last year.

The second misperception is that if stocks do well in 2003, REITs will not. History simply does not corroborate this assertion and the diversification benefits of REITs are extent irrespective of the stock market cycle. Whereas many analysts have tried to predict REIT performance relative to the stock market, we believe that this is simply not an appropriate comparison. In addition, the stock market debacle of the last three years has disillusioned many investors and encouraged greater investment in more predictable asset classes, such as real estate. The continued demand for property investments has stabilized private market values, and there are a growing number of institutional and individual investors seeking to increase their exposure to the real estate asset class. The proven success of the REIT format has attracted much of this capital to the public market. Early estimates indicate that in 2002 REITs garnered over 20% of institutional investor real estate commitments, more than double that in 2001. Real estate values should hold up as long as the economy grows, interest rates do not soar, and the demand for property investment remains strong — all of which we expect to happen. Finally with interest rates and total return expectations generally low, achieving one’s investment objective primarily through income may well attract even more investors to REITs.

At the end of 2002, Cohen & Steers Realty Shares held 4.06% of its assets in three healthcare REITs: Health Care Property Investors, Nationwide Health Properties and Ventas.

Editor's Note: Closed-End Fund Advisors invests in Real Estate Investment Trusts as part of its asset allocation.

H&Q Healthcare Investors and H &Q Life Sciences Investors
Reprint of Selected Sections of "Letter to Shareholders"

To our Shareholders:

At quarter end on June 30, 2003, the net asset value of your fund was $19.54. The net asset value increased by 19.4% during the most recent quarter. A change that lagged the American Biotech, The NASDAQ Composite and the Russell 2000 Indices but was favorable to the Dow Jones Industrial Average. The share price increased by 26.1% during the Quarter ....

[For H & Q Life Science Investors, the share price increased 25.3% during the quarter.]

Last quarter, we indicated that the first quarter many have been a significant turning point and that we were optimistic about the next few quarters. This was based on our impression that the public was beginning to look forward rather than backward .... Overall we remain cautiously optimistic about the rest of the year ....

There is less caution to our optimism in healthcare sectors. We are currently favorable toward the pharmaceuticals, toward the generic pharmaceutical producers and towards the biotech sector. The large pharmaceutical companies have been beaten up a bit over the last few years. In some cases, revenues and EPS levels have not met expectations. This has been due to several factors, including a tighter FDA, and the expiration of patents that allow premium pricing. As a result, the pharmaceutical group is now trading at a discount to its traditional valuation ....

[Biopharmaceuticals are 26.1% of H&Q Healthcare Investors, 26.6% of H & Q Life Sciences Investors.]

We also think that the public biotech sector has considerable upside potential. We have little doubt that the large pharmaceutical companies will continue to look to biotech companies to fill their product pipelines. In fact, it looks to us that Big Pharma may actually increase its reliance on the biotech sector and will use it not only for the discovery of new molecules but also for preclinical and clinical development of product candidates .... We have long been of the opinion that, under the right circumstances, drug discovery and (early stage) drug development can be done better, faster and cheaper in the hands of small, entrepreneurial biotech companies.

In the last quarter, we did not add new positions to the venture portion of the portfolio. We continue to evaluate a number of private investment opportunities, but have made a number of public purchases for the Fund(s) as well as added to several existing positions. We also exited several other investments in the public portion of the portfolio(s).

As always, we encourage the Fund’s shareholders to contact us with any questions or concerns they have relating to the Fund(s).

ALAN G. CARR, President Emeritus

We will feature an interview with the principals of these funds in our October newsletter.

Semi-Annual Report: Templeton Dragon Fund
Reprint of Selected Sections

We are pleased to bring you this semi-annual report for Templeton Dragon Fund covering the period ended June 30, 2003. During the six months under review, China’s and India’s economies recorded healthy gross domestic product (GDP) expansion rates. Recent data showed some strong gains as China’s GDP grew 8.9% annualized in April, after growing 9.9% annualized in the first quarter of 2003. May 2003 exports and imports surged 37.3% and 40.9% over May 2002, resulting in a trade surplus of $2.2 billion USD, while May’s industrial output rose 13.7% over May 2002. Foreign direct investment inflows slowed in April and May due, in part, to the effects of China’s battle with severe acute respiratory syndrome (SARS); however, a solid 48% overall gain was tallied in the first five months of 2003 ....

For the six months ended June 30, 2003, Templeton Dragon Fund delivered a +25.76% cumulative total return in market price terms and a +19.82% in net asset value terms ....

In May, we completed a tender offer and bought back a total 6,656.425 shares of the Fund’s common stock. We funded the purchase largely by decreasing certain stock holdings that we believed were less attractively valued ....

Of course, investing in any emerging market means accepting a certain amount of volatility and, in some cases, the consequences of severe market conditions. For example, Hong Kong’s equity market has increased 339.54% in the last 15 years, but has suffered seven quarterly declines of more than 15% each during that time. Investing in emerging markets, particularly “China companies,” also entails special considerations, including risks related to market and currency volatility, adverse economic, social and political developments, and the market’s relatively small size and lesser liquidity. Also, as a non-diversified investment company, the Fund may invest in a small number of issues, which could result in a greater risk of loss.

Thank you for investing in Templeton Dragon Fund. We appreciate your confidence and welcome your comments.

President and Chief Investment Officer-Investment Management
Templeton Dragon Fund, Inc.

For more information on Franklin/Templeton Investments, call Franklin Templeton Investments at 800-342-5236.

What Me Emotional?

Ask any group of investors, professional or individual, if emotion ever plays a part in their decisions and almost all will say, “Absolutely not; I analyze companies and judge their stocks rationally.”  Yet experience shows that emotional biases and mood shifts are mainly responsible for the short-term and immediate-term swings in prices of individual stocks, and the market as a whole.

Source: The Babson Staff Letter, August 22, 2003

Letter to the Editor

Dear Mr. Scott,

I liked your July/August issue with your interview with James Squire. I would have preferred the original quote (in the interview) by Thomas Jefferson on luck: “I find the harder I work the luckier I get”, than the copy by Gary Player despite the huge admiration for the latter!

Best Regards.
P. GRAHAM, Lancashire.

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