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Closed-end fund halts redemptions due to market woes

FUNDS REPORTER

JovFunds Management Inc. has suspended redemptions in its Deans Knight Income and Growth Fund for up to 120 days to get more time to sell debt securities to pay for potential annual payout requests.

The $28-million closed-end fund, run by Vancouver-based Deans Knight Capital Management Ltd., has an annual redemption feature whereby its unitholders can get out of the fund at its net asset value (NAV), and that date is looming on Sept. 29.

"We don't think that the assets can be fairly valued for the purposes of the redemption" because they hold some illiquid bond securities, Steven Hawkins, a managing partner with Toronto-based JovFunds Management, said yesterday.

"The fund's performance was impacted by the markets."

The move is the latest among redemption woes faced by unitholders in Canadian closed-end funds hurt by the market debacle of last year or poor-performing investments.

Eighty per cent of the fund is in cash or in securities that can be sold, but "we don't think it would be fair to allow shareholders to make redemptions right now when the valuation of these private company assets could be in question," Mr. Hawkins said in an interview.

Investors in the Deans Knight Income and Growth Fund, however, can still submit requests for redemptions during the temporary suspension period that is not expected to be extended, he added.

Three closed-end funds run by Toronto-based Northwater Capital Management Inc. also face problems in returning monies to investors because they are invested in hedge funds that cannot meet their own redemption requests.

"Managers are trying to protect the value of their investments and in some cases they are not willing to sell these assets in a poor market," said Mohamed Khaki, vice-president of client services at Northwater Capital. "There were very few [hedge fund] strategies that were spared in the last couple of years."

The $15-million Northwater Five-Year Market-Neutral Trust, which is invested in some 20 mainly U.S. market-neutral hedge funds, has a termination date of June 30, but has only been able return some cash.

Northwater has also been trying to unwind the $15-million Northwater Market-Neutral Trust before its Dec. 31, 2009, termination date; and the $4-million Northwater Top 75 Income Trust Plus before its original termination date in 2011.

(The latter fund has run into problems because of the demise of income trusts since they must convert to a corporation by 2011, and because it, too, owns some hedge fund investments.)

"Given the volatility in the market in the last year and half, we thought it was prudent to raise the cash," he said. "As we receive proceeds from the underlying funds, we will distribute them."

On another front, the acquisition in June of a group of Citadel closed-end funds by Crown Hill Capital Corp. has raised concerns among Citadel investors about their redemption rights.

Eight Citadel funds are to be merged into the Crown Hill Fund - with the continuing fund to be called Citadel Income Fund. It will be run by Jarislowsky Fraser Ltd., which was hired last month to manage the Crown Hill Fund. However, some investors of the Citadel funds have been upset because the Crown Hill Fund does not have an annual redemption feature.

In late July, however, Crown Hill appeared to have answered its critics with a new proposal to allow Citadel unitholders to redeem their shares at NAV in most cases prior to the merger and in subsequent years as well.

"Next year, they [Citadel unitholders] will be able redeem as many units as they like, and in subsequent years there is an annual redemption of up to a maximum of 10 per cent of the fund," said a spokesman for Citadel.

While investors in the Citadel funds were expected to vote on the merger on Sept. 3, that meeting has been delayed because rival Brompton Group and Bloom Investment Counsel are also vying for unitholder approval for an alternative proposal.

If Citadel unitholders vote in favour of the rival group's proposal, they would also subject to a breakup fee of nearly $17-million.

****

Redemption woes

Several Canadian closed-end funds are facing redemption challenges due to the market downturn

DEANS KNIGHT GROWTH AND INCOME FUND

(DKI.UN-TSX)

Yesterday's close $6.61, down 13 ¢

NORTHWATER FIVE-YEAR MARKET NEUTRAL TRUST

(NYF.UN-TSX)

Yesterday's close $5.13, unchanged

***

CLOSED-END FUNDS

A closed-end fund is like a traditional mutual fund except that it has a limited number of units and trades like a stock on an exchange.

The net asset value (NAV) of a fund is the total value of the securities divided by the number of units. A fund may trade at a premium to its NAV if there is high investor demand for the fund, expectations that it will perform well in the near future or if there is high regard for the management team. Conversely, the fund may trade at discount to its NAV if there is low demand, expectations the assets will perform poorly or management is not as highly regarded. Closed-end funds may allow investors to redeem at the fund's NAV - such as once annually - and may have a termination date. Shirley Won

© 2007 The Globe and Mail. All rights reserved.

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