That Closed-End Feeling
Asian stock markets are rebounding, and investors who have jumped into the region in the last couple of weeks have made very good money.
What does that mean? It means you’re probably sitting at home wondering how you can get in on the action.
A direct way for individual investors to play the Asian rebound is by investing in closed-end funds that focus on Asian stocks. But investors must be choosy about what they buy--some of the funds have gotten pricey. And the last thing you want is overvalued securities that are tied to troubled markets.
Closed-end funds are mutual funds that act like stocks, trading on the exchanges throughout the market day. They issue a fixed number of shares, occasionally adding more money with additional public offerings. While investors who own open-end mutual funds (the most common type of fund) can always redeem their shares from the fund company itself, closed-end fund owners must sell their shares on the market--at the market price.
In this case, it’s also important to distinguish between single-country funds that invest in the stocks of just one nation and multi-country funds that spread their exposure.
It’s the single-country funds that have have gotten expensive, experts say, which could make a risky situation even riskier. In contrast, many multi-country funds are reasonably priced and could prove to be better bets.
Like any other fund, a closed-end fund has what’s known as a net asset value. That’s the total value of the stocks the fund owns divided by the number of shares it has issued. But because a closed-end fund is bought or sold at whatever market price prevails, it may trade at a discount or a premium to its NAV.
In other words, some funds trade for less than the actual value of their stocks while others change hands for more than that actual value.
*
For example, if a closed-end fund trades for $8 but its NAV is $10, it’s said to be priced at a 20% discount. If it sells for $12, it has a 20% premium.
If the NAV is the true value, why would the fund sell for some other amount? Because like anything else traded on an exchange, its worth is ultimately determined not only by its fundamentals, but by the price investors on the open market are willing to pay for it.
Which brings us back to country funds.
Lately, Asian country-specific funds have been changing hands at enormous premiums. Take the Thai Fund, for example. As of Friday, it was trading at a gigantic 122% premium. That means investors have been shelling out more than twice the value of the fund’s underlying stocks. That’s dangerous in the best of markets but especially so in the troubled Asian region.
*
It’s important to remember that many Asian economies are likely to remain in trouble for some time despite the nascent rebounds in their stock markets. Many professional investors, in fact, are buying on the expectation that Asian economies will recover in a year or two following severe downturns that could last through 1998 and beyond.
Of course, the NAVs of these funds could rise faster than their market prices, shrinking the premiums. Still, “stay away from funds with large premiums because you’re paying $2 for every dollar’s worth of assets,” said Jim Libera, editor of the Closed-End Country Fund Report newsletter.
The prices of many single-country funds are so much higher than their NAVs for a simple reason, experts say. When the Asian markets began tumbling last year, many investors held on to their shares. Some people were probably buy-and-hold investors who were determined to ride out the downturn. Others may have wanted to get out, but the markets fell so fast they never got the chance, so they figured they might as well stay in.
Also, single-country fund prices have risen recently when bottom-fishing investors bought them on the expectation the markets would recover.
Many multi-country funds, by contrast, are trading at slight discounts.
The main reason is Asian multi-country funds are more diversified. Their NAVs didn’t go down as much as the values of single-country funds last year because they own shares in countries such as Australia or Taiwan that weren’t pummeled. Also, investors have been less anxious to buy them lately because they offered less of a potential bounce than funds targeting specific countries.
“Hands down, the best way to get into Asia right now would be to use the multi-country closed-end funds trading at discounts,” said Patrick Winton, editor of Closed-End Fund Digest & Real Estate Securities newsletter.
Specifically, Winton recommends Templeton Dragon and Morgan Stanley Asia Pacific. Libera likes Asia Tigers and Fidelity Advisor Emerging Asia.
Closed-ends have been around since the 19th century but were eclipsed by the far more common open-end variety long ago. Closed-ends are often used for riskier types of investing such as foreign stocks, leveraged bond bets and other illiquid securities.
When the underlying investments fall in price, managers of closed-end funds don’t have to cope with a wave of redemptions that would drive the value of the funds down further. Likewise, they don’t have to handle a flood of new cash when times are good.
Hypothetically, the structure of closed-ends should help investors. Because they’re traded on exchanges, closed-ends are supposed to let investors trade in and out of them more easily than they could with open-end funds. But very often, closed-ends don’t work out.
By their nature, many closed-ends usually trade at discounts.
Supporters like closed-ends because they say there’s a lot of money to be made buying at steep discounts and selling when they narrow. But closed-ends have gotten something of a bad reputation among small investors, some of whom got burned when emerging markets stumbled in 1994.
The key when buying many closed-ends, experts say, is to check the historic discount. There’s no use buying a fund that’s fallen to a 20% discount if it usually trades at a 20% discount.
*
Street Strategies explores investment tactics and ideas. Times staff writer Walter Hamilton may use strategies he writes about in his personal account. He can be reached at walter.hamilton@latimes
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
When Premium May Be Too Rich
Many Asian closed-end country funds are trading at extremely high premiums to net asset value, which means investors are paying far more for those funds than the underlying stocks are currently worth. Apparently, they expect these markets to recover. Some of the funds with the highest premiums:
*--*
Ticker Monday Monday Pct. Premium/ Fund symbol close change change discount* Thai TTF $9.94 +0.94 +10.4% +122% Indonesia IF 7.13 +1.56 +28.1 +91 Malaysia MF 9.50 +0.94 +11.0 +89 Thai Capital TC 6.19 +0.38 +6.5 +85 Jakarta Growth JGF 4.44 +0.56 +14.4 +83 Korea Equity KEF 4.13 unch. unch. +35 Japan Equity JEQ 8.13 +0.19 +2.4 +27 Korea KF 8.81 -0.25 -2.8 +26
*--*
But many multi-country Asian funds trade at small premiums or discounts. These funds sometimes include stocks of nations less affected by the Asian crisis, such as Australia, China and Taiwan:
*--*
Ticker Monday Monday Pct. Premium/ Fund symbol close change change discount* Asia Tigers GRR $9.50 +0.88 +10.2% +4% Scudder New Asia SAF 12.19 +0.69 +6.0 +1 Templeton Dragon TDF 11.54 +0.69 +6.3 0 Schroder Asian SHF 8.31 +0.44 +5.6 0 Fidelity Em. Asia FAE 10.94 +1.06 +10.7 -4 Morgan St. Asia APF 8.94 +0.56 +6.7 -5*
*--*
Based on Friday’s close
Source: Bloomberg News
