Managerial skill and closed-end fund discounts

Bleaney, Michael; Smith, R. Todd

doi:10.1007/s11408-010-0144-8

Cited by 4 publications

(13 citation statements)

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“…One of the merits of this model is that it addresses the question of the CEF discount in its purest form, that of an index fund, for which there are no significant issues of liquidity or managerial skill. As we have shown elsewhere, where they exist index CEFs tend to trade at a discount, and this fact probably explains why they are unattractive to investors as new issues, so that the CEF sector largely remains the preserve of actively managed funds (Bleaney and Smith, 2010). The model also explains how OEFs can trade at NAV whilst CEFs trade at a discount.…”

Section: Discussionmentioning

confidence: 64%

“…Cherkes et al (2009) estimate the average expense ratio on all US CEFs over the period 1986-2006 at 1.3 percent, which is quite close to Ruckman's (2003) estimate of 1.5 percent for all US OEFs in the year 1999. For index funds specifically, Bleaney and Smith (2010) report the average expense ratio on 28 UK open-end index funds for the year 2009 at 0.8 percent, whilst for the same year the three existing UK closed-end index funds had expense ratios in the range 0.3-0.83 percent.…”

Section: Discussionmentioning

confidence: 99%

“…New funds can be created and sold at NAV if the perceived skill of the managers is overestimated, as discussed by Ferguson and Leistikow (2004). A few of them may subsequently become index funds because investors become disillusioned with the managers' skill and demand a change of mandate, as has happened on occasion in the UK market (Bleaney and Smith, 2010).…”

Section: Actively Managed Fundsmentioning

confidence: 99%

“…One possible explanation is that the fees charged exceed the skill of the managers (Berk and Stanton, 2007;Leistikow, 2001, 2004;Ross, 2002). There is certainly evidence that discounts respond to perceived skill, since funds with higher asset returns tend to trade on lower discounts (Bleaney and Smith, 2010), but that does not prove that the average fund trades at a discount just because average fees exceed the extra returns provided by the average manager's skill. Ferguson and Leistikow (2001) and Ross (2002) argue that funds are created when investors overestimate the skill of managers, buying the initial public offering (IPO) at a premium that covers the issue costs, and fall to a discount as investors discover the true level of managers' skill.…”

Section: Introductionmentioning

confidence: 99%

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Excess volatility and closed‐end fund discounts

Bleaney

Smith²

2013

Review of Accounting and Finance

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Purpose -The purpose of this paper is to examine the conditions under which discount risk leads to closed-end funds trading at a discount. Design/methodology/approach -A model of investor portfolio choice is developed in which investors face proportional fees for holding managed funds but fixed transaction fees for purchasing other risky assets. The conditions under which investors will hold shares in closed-end funds are derived. Findings -It is shown that, with fixed transaction costs in the market for risky assets, investors with wealth below a certain threshold will hold pooled index funds that charge a proportional fee, rather than the market portfolio chosen by wealthier investors. If a portfolio of closed-end index funds yields greater volatility of returns to investors than open-end index funds (i.e. displays "excess volatility"), and charges the same fees, the closed-end funds need to trade at a discount in equilibrium to attract buyers. The same applies to actively managed funds if higher fees fully reflect extra expected returns from the managers' skill. Practical implications -A primary determinant of closed-end fund discounts is discount volatility and co-movement across funds. Originality/value -Until now it has been argued that discount risk needs to be systematic (correlated with market returns) to be priced. The evidence that discount risk is systematic is weak. There is strong empirical evidence of excess volatility and co-movement of discounts across closed-end funds, which in our model are a sufficient condition for funds to trade at a discount, under plausible assumptions. This model thus provides a stronger argument that discount risk explains why discounts exist.

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Section: Discussionmentioning

confidence: 64%

Section: Discussionmentioning

confidence: 99%

Section: Actively Managed Fundsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Excess volatility and closed‐end fund discounts

Bleaney

Smith²

2013

Review of Accounting and Finance

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“…The closed-end fund puzzle is an exhaustive subject and we only scratch the surface here. (For comprehensive descriptions of the puzzle and its many explanations, see, for example, Lee et al, 1991, Deaves and Krinsky, 1994, Chay and Trzcinka, 1999, Ferguson and Leistikow, 2001, Dimson and Minio-Paluello, 2002, Berk and Stanton, 2007, and Bleaney and Smith, 2008 3.2 Asymmetric market valuation…”

Section: Symmetric Market Valuationmentioning

confidence: 99%

Mental time travel and the valuation of financial investments

Blake

Pickles

2021

RBF

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PurposeThe purpose of this paper is to portray the valuation of financial investments as mental time travel.Design/methodology/approachIn a series of thought investments, $1 invested in an investment fund is mentally projected forward in time and then discounted back to the present – with no objective time passing. The thought investments feature symmetric valuation (in which discount rates exactly match projection rates) and asymmetric valuation (in which discount rates and projection rates happen to differ). They show how asymmetric valuation can result in differences between the current personal value and market value of an investment and, by way of real-world illustration, between a closed-end investment fund's net asset value and its market value. The authors explore possible reasons for asymmetric valuation.FindingsThought investments illustrating mental time travel can be used to help understand both financial investment valuation generally and, more specifically, established explanations of the closed-end investment fund puzzle. The authors show how different expectations, different perceptions of time and risk and different risk and time preferences might help determine value.Originality/valueThere are vast literatures on prospection, discounting and future-orientated or intertemporal decision-making. The authors’ innovation is to illustrate how these mental activities might combine to facilitate financial investment valuation. In particular, the authors show that a low personal discount rate could be a consequence of a shortened perception of future time and vice versa.

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