Closed–End Fund Performance

Abstract

RICHARD SPURGIN is an assistant professor of finance at Clark University in Worcester, Massachusetts. R ecent studies on the performance of closed-end country fund performance have concentrated on analyzing the levels and changes in fund discounts, the sources of excess volatility of closed-end funds relative to net asset value, and the pricing of closed-end country funds, as well as the implications of the introduction of closedend funds on capital market integration Ž and market efficiency Lee et al. 1991 ; Bailey and Lim 1992 ; Johnson et al. 1993 ; Diwan et al. 1993 ; Hardouvelis . et al. 1995 ; Malkiel 1995 . Most of these analyses, however, concentrate on closedend country funds traded in the United States. Few studies exist on the relative performance of comparable closed-end country funds traded in the United States and other international capital markets Ž . e.g., United Kingdom . Differences in fund clientele and market structure may explain some of the variation in the price of the fund relative to the net asset value Ž . Ammer 1992 . In this article, a paired set of comparable closed-end country funds traded in the United States and the United Kingdom are analyzed for their relative fund performance as well as their relative discount or premium to net asset value Ž . NAV . The next section reviews previous evidence on the factors that determine fund return and the discount premium of closed-end funds. The data and methodology used in the study are presented in the third section. Shares in closed-end country funds are issued in one country, referred to herein as the host country, and the fund makes investments in another country, termed the local country. If investor sentiment plays a role in the value of the fund, then there are two possible sources of changes in sentiment. Investors could be responding to changes in the local country or responding to changes in the host country. As in previous studies, we compare closed-end country fund price and discount returns with an index from the Ž host country the United States and the . United Kingdom and also the local market index. Using funds that have the same local country but different host countries allows us to gain insight into the role of the host country’s index on the discount. These results are discussed in the fourth section. Results indicate that, although the discount return may be related to investor sentiment impacts, the actual process that drives the discount is complex. Results indicate that there is a higher correlation between the discount returns and the host country index than