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Closed-end funds trading at a premium

WHAT ARE WE LOOKING FOR?

Yesterday, we looked for bargains among closed-end funds - investment products that are similar to mutual funds, yet trade on a public exchange, like stocks. Today, we examine the other end of the spectrum - closed-end funds that look overpriced.

THE SCREEN

To do this, we focus on the most commonly used valuation measure for closed-end funds - price relative to net asset value (NAV).

Most closed-end funds trade at a slight discount to NAV (usually 2 to 6 per cent), reflecting the risk built into their lack of liquidity. A smaller discount than this, or even a premium to NAV, might imply that a fund is overvalued - a potential sell signal.

There are about 240 listings classified as closed-end funds on the Toronto Stock Exchange, but included in that are more than 60 "split share" products - instruments that take a dividend-bearing underlying asset and split it into two parts, allowing investors to buy either purely the dividend stream or purely the capital appreciation. Since split share products are valued and traded very differently from the typical mainstream closed-end funds, we have excluded them from our list.

THE RESULTS

Only a handful of funds are actually trading at a premium to NAV. Much like some of the funds turned up in yesterday's screen for deep discounts to NAV, some funds trade at premium for good reason.

The most common reason is best described as scarcity value: It offers retail investors something they couldn't easily get anywhere else.

For example, the Urbana funds (at the top of our list) invest directly in the red-hot business of securities exchanges. While that includes owning shares in some publicly traded securities-exchange companies, it also includes stakes in non-public companies as well as highly coveted exchange seats. (Urbana owns 18 seats on the Chicago Board Options Exchange, valued at more than $3-million each.)

Similarly, Central Fund of Canada Ltd. owns gold bullion as its underlying asset, something that can prove awkward for individual investors to physically own.

Finally, funds that only recently went public will often trade at a premium, because investors value them based on their net asset value at the time of the initial public offering, yet those assets get immediately depleted to cover fees stemming from the IPO itself. This is the case for Global Agribusiness Trust, which went public in mid-November.

Other names trading at a premium may well be sending sell signals, but investors need to look beyond this data to identify the underlying cause for the premium. The NAV screen should be considered just a starting point for further research.

Closed-end funds - premiums to NAV % PremiumAverage
$ Priceor discount%weekly
Fund NameSymbolNAV Date$ NAVDec. 12to NAVYieldvolume
Urbana Corp.URB-T7-Dec-20073.385.0248.7n/a19,843
Urbana Corp. Class AURB.A-T7-Dec-20073.384.8644.0n/a695,444
Central Fund of Canada Ltd.CEF.A-T12-Dec-200710.2510.845.80.1110,772
Global Agribusiness TrustAGB.UN-T12-Dec-20079.329.805.1n/a34,400
DiversiTrust Energy Income FundDTN.UN-T12-Dec-20075.655.873.918.461,476
Precious Metals and Mining TrustMMP.UN-T6-Dec-200711.6712.103.79.9125,019
First Asset REIT IncomeRIT.UN-T6-Dec-200712.1512.250.87.897,840
Central Gold-TrustGTU.UN-T12-Dec-200731.0331.200.5n/a30,939
Utility Corp.UTC.C-T6-Dec-200762.6763.000.53.37,547
Aberdeen G7 TrustGSV.UN-T12-Dec-20079.859.870.27.399,906
Diversified Income Trust IIDTT.UN-T6-Dec-200712.9212.920.07.419,728
High Income Pref Shares Corp.HPF.PR.A-T7-Dec-200725.0024.89-0.45.95,534
High Inc Principal & Yld Sec Cp PFPAY.PR.A-T7-Dec-200725.0024.89-0.45.510,697
BG Advantaged Corporate BondBAC.UN-T6-Dec-20078.027.98-0.57.456,327
Skylon Intl Advtg Yield Trust (US$)SIA.U-T12-Dec-20079.949.89-0.55.110,027
Faircourt Gold Income Corp.FGX-T11-Dec-20079.369.25-1.15.414,830
Ravensource FundRAV.UN-T6-Dec-20079.299.16-1.42.029,439
Skylon Global Cap.Yield Trust IISPO.UN-T12-Dec-200725.1024.75-1.47.316,271
DiversiTrust Income FundDTF.UN-T12-Dec-200716.0815.82-1.66.144,343
Acuity Growth & Income TrustAIG.UN-T6-Dec-200711.1911.00-1.76.467,539

Note: Excludes split shares

SOURCE: GLOBEFUND

dparkinson@globeandmail.com

© 2007 The Globe and Mail. All rights reserved.

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