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Minyan Mailbag: Closed End Funds


You may not be exposed to as much upside equity performance as you might think


Professor Succo,

Good Afternoon from Italy. I have been looking at convertible closed end funds as a long term investment. I have very little classic equity exposure, so if I am wrong about the markets, at least it would give me some upside participation to equities.

There seem to be huge differences in the dividend yields, premiums/discounts and equity choices of all the funds.

I am, of course, looking for understanding more than advice here, but how can one value the different funds.

The dividend yields, for many of the funds, don't appear to be convertible style yields. Is this done only with leverage or do they payout some of their assets through dividends? Or is there something else going on? I assume, just looking at the yields, that the lower ones are lower risk, but that could easily be wrong... Maybe the lower yield implies being more in the money and being more equity sensitive...

Why are people paying such high premiums for funds such as Calamos (CHI)? All things being equal (which they aren't of course) it seems like a 15% discount would be a lot better than a big premium, no?

Obviously I have been looking at the old info of the holdings to get an idea of the risk and looking at the volatility of the fund to get an idea of the risk.

Any thing else I am missing here...?


Minyan Mattison


When buying closed end funds, make sure you look at the underlying securities to get a good feel for what they are actually doing despite what they say they are.

I suspect that a good portion of a closed end convert fund positions are straight corporate debt, thus increasing the quoted "dividend yield." If this is the case, you may not be exposed to as much upside equity performance as you might think.

-Professor Succo

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