Closed-End Investment Companies
Academic study of how discounts and premiums behave over time.
Summary
The reference has not verified this book in detail; the summary states only what the title, author and subject establish.
Anderson and Born wrote this academic monograph on closed-end investment companies, surveying the structure, the history and the research literature. The reference has not verified the detailed contents.
A closed-end fund raises capital once through a public offering, invests it, and then its fixed number of shares trades on an exchange. Because no new shares are issued and none are redeemed, the market price is determined by supply and demand for the shares rather than by the value of the holdings, so the two diverge.
That divergence has been studied extensively and remains unresolved. The documented pattern is that funds are issued at a premium to net asset value, which means the offering price includes the underwriting costs and the buyers pay them; the price falls to a discount within a few months; discounts persist for years and average around ten per cent; discounts on unrelated funds move together, which points to a common factor; discounts narrow when a fund announces open-ending, liquidation or a tender offer, which confirms the underlying assets are worth more than the shares; and returns to buying at wide discounts have historically been positive.
Proposed explanations include unrealised capital gains tax liabilities, illiquidity of the underlying holdings, management fees capitalised into the price, agency costs, and investor sentiment, which Lee, Shleifer and Thaler proposed and which remains the most discussed.
The volume covers the American market's history, including the 1920s leveraged trusts whose collapse contributed to the Depression-era regulation of investment companies. Readers should verify the book's specific coverage and note that it is from 1992.
Key takeaways 7
- A closed-end fund's fixed share count means its market price is set by demand for shares rather than by the value of its holdings.
- Funds are issued at a premium that includes the underwriting cost, so initial buyers pay it and lose it within months.
- Discounts persist for years and have averaged around ten per cent, which no risk-based explanation accounts for.
- Discounts on unrelated funds move together, which points to a common sentiment factor rather than fund-specific causes.
- Announcing open-ending, liquidation or a tender offer narrows the discount, confirming the assets are worth more than the shares.
- Buying at wide discounts has historically produced positive returns relative to holding the underlying assets directly.
- Leveraged investment trusts of the 1920s and their collapse produced the regulation of investment companies that still governs the sector.
Who should read it
Investors and researchers interested in the closed-end discount and in structures where price diverges persistently from underlying value.
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Where it sits in the reference 1
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