Closed-end funds have indeed become a highly respected financial product in the market. A considerable number of investors have made closed-end funds their fallback option. However, in the face of the fast-changing closed-end fund market, many investors are unable to grasp the timing and even fall into the misconceptions of investment.
There are generally three options for closed-end funds at maturity, namely extension or expansion, liquidation and closure to open. The extension or expansion of the market basically no impact, but due to the expiry of the program must be convened to consider the general meeting of holders, in the closed-end funds under the long-term high discount extension or expansion of the interests of the holders of the least likely to implement this program. The two more likely scenarios are maturity liquidation and closed to open. In the liquidation at maturity scenario, the fund management company would be required to enter into liquidation early and, based on international averages, the liquidation at maturity cost would be around 5%, so the level of excess expected annualized return to investors would be the theoretical internal expected annualized rate of return less the liquidation cost component. In the closed to open scenario, the secondary market trading price has basically reverted to the net value during the implementation of the scheme. After the conversion to an open-ended fund, the scope for redemption arbitrage has been relatively small, and only a relatively fixed percentage of redemptions is maintained as in the case of other open-ended funds, and the impact on the market is smaller.
In a closed-end to open scenario, the timing of the implementation of the programmed varies and so does the impact on investors' excess expected annualized returns. Analysis shows that the discount on holdings is positively correlated with the internal expected annualized return when a closed-end conversion is implemented for US closed-end funds. However, there is no significant relationship between the discount and the internal expected annualized return for highly discounted funds that do not have a closed to open expectation. In relation to the arbitrage opportunities under our closed-end funds, it can be seen that the timing of the scheme varies, as does the scope for arbitrage for specific fund types and the excess expected annualized returns for investors.
If the scheme is to be closed to open in advance of maturity, then the proximity of the fund's maturity date is irrelevant and there is more room for profit from investing in large cap funds with high discounts; if the scheme is to be closed to open only at maturity, only small cap funds with close maturity dates will be able to achieve excess expected annualized returns in a shorter period of time, while large cap funds with distant maturity dates will only be able to seek rebound opportunities in secondary market trading prices under a similar effect. Large cap closed-end fund discount rate is generally above 40%, once there is the introduction of closed to open program, high discount fund return will accelerate the road, investors are expected to obtain more than the theoretical internal expected annualized return of excess expected annualized return.
On balance, we believe that closed-end funds will be more active after the Chinese New Year and there will be more investment opportunities. We recommend that investors make closed-end fund investments to capture the above two major entry points. That is, while focusing on the net value growth potential, taking into account the level of discount rate, so as to obtain higher excess expected annualized returns.
