Closed-end funds, the fun never ends

Stimulated by the news, closed-end funds staged a skyrocketing trend.

"Securities Times" reported the news that the management deployed the fund's expiry seal to open. On the same day, the fund index reappeared in the mad cow market. 54 funds rose across the board, with an increase of more than 1%, and the fund index rose as high as 2.91%. Closed-end funds continued to surge on Tuesday.

Since the beginning of November last year, with the recovery of the stock market, closed-end funds have also begun to walk out of a new market. Factors such as excessive discount rate and the expectation of closing and opening have made them a hot spot sought after by market investors. Especially in the past month, the Shanghai and Shenzhen stock market fund index rose more than 15%.

Smooth transition due to natural maturity

It is reported that "natural maturity and smooth transition" is a compromise between the two schemes of "closing and opening" in advance and liquidation at maturity, which reflects that the regulatory authorities have stably resolved the high discount of closed-end funds. Operational thinking of the problem.

The current proposed "sealing and re-opening" of funds due to maturity is different from the advance sealing and re-opening required by insurance companies. The closing-end fund avoids the impact of centralized redemption and arbitrage funds on the market. After the expiration, it will be converted into an open-end fund through the exchange system, and it will continue naturally. If the holder wants to redeem the funds, he can redeem it according to the net value; if he wants to continue to hold it, he can also hold the open-end fund all the time. In this way, the stability of the market and the smooth transition of the fund are both realized.

In fact, after the closed-end fund expires, whether it is liquidated or closed, investors can distribute or redeem it according to its net value. As the maturity date approaches, the secondary market price of the fund will gradually move closer to the net value, and the two should be quite close before the maturity date.

It still has investment value

"The news of the expiration of the closed-end fund cannot be understood as a positive for closed-end funds. To a certain extent, it can even be understood as a negative for large-cap closed-end funds." Haitong Securities Analyst Lou Jing said. "For closed-end funds, there are only three options for where to go. One is the expiration solution, the second is the early solution, and the third is the extension. Whether it is early opening or early liquidation, it can bring huge amounts of money to the holders. Returns. And when it expires, the closed-end fund is opened, which means that the short-term profit of the holder is in vain." "No matter what solution, at a substantial discount, closed-end funds have better medium and long-term investment value." Lou Jing Said, "Last week, although the secondary market of closed-end funds saw a large increase, due to the larger increase in net value, the actual discount increased. These may be the reasons for the sharp rise in closed-end funds recently."

From the perspective of foreign countries, the discount tendency of closed-end funds generally increases in bear markets, while the discount tendency of closed-end funds decreases in bull markets.

Small-cap funds have low risk and low returns, and are the best choice in bear markets; large-cap funds have high risks and high returns, and are better choices in bull markets. When initially investing in closed-end funds, QFIIs chose small-cap closed-end funds with relatively stable expectations, and as QFIIs are optimistic about the Chinese market for a long time, they have aroused their enthusiasm for low-priced large-cap closed-end funds.

Tianxiang Investment Consulting analyst Zhang Jianhui believes that the idea of expiring closed-end funds will accelerate the value return of small-cap closed-end funds with the concept of expiration, considering the cost of transformation (with 3% as a reference) and waiting costs (according to Calculated with a one-year waiting cost of 2% and an average remaining duration of 1.5 years, waiting cost = 3%), the price of a small-cap closed-end fund with the concept of maturity will have an independent increase of about 15% (relative net value).

For large-cap closed-end funds, higher discounts imply higher yields. However, this idea also means that the expectation of "advance" implementation of the closure and opening is temporarily unsuccessful, and the longer expiration time brings higher uncertainty (a 10% discount is given to buffer market fluctuations) and waiting costs (according to a 2% waiting cost per year and remaining duration of 8.7 years on average, waiting cost = 19%). According to this calculation, the price of large-cap closed-end funds will have an independent increase of about 20% (relative net value).

Of course, due to the long remaining time, relevant speculation (such as excessive speculation) and market fluctuations during the period will bring about fluctuations in the fund price. Investors should take precautions against this risk and grasp the market trend in stages.

"In the short-term, closed-end funds still have room to rise." Lou Jing analyzed, "but the trend will still be repeated, because it is still too early to expire, if the average discount rate of 35% is reached, investors can sell first. If it falls, we will intervene when the market is low.”

If you hold a large-cap fund for a long time and redeem it at maturity, the possibility of loss is very small. Now the discount rate of large-cap funds is around 40%. Net worth is also unlikely to drop by that much.

Natural maturity arbitrage

Compared with purchasing open-end funds, buying closed-end funds is equivalent to buying a combination of stocks at a price of 40% or 30% off the net value. Its essence is to hold a portfolio of stocks behind the fund. Obviously, investing in open-end funds does not have the "defensive pad" of the discount rate to support, and must also bear the market systemic risks and the non-systematic risks of fund operations.

Hu Lifeng, chief fund analyst of Galaxy Securities, proposed the establishment of a closed-end fund natural maturity arbitrage trading plan. He said that you can choose only one fund for risk-free arbitrage trading, or you can choose several funds to build a portfolio for risk-free arbitrage, or you can design according to the period of use of the funds.

Take the first expiring fund as an example: Fund Xingye expired on November 14, 2006 with a remaining term of 0.60 years. On April 7, its unit net value was 0.9591 yuan, and its price was 0.874 yuan. The difference is 0.0851 yuan, and the net value is reflected as a discount compared with the price, and the discount rate is 8.87%. Now buy at 0.874 yuan, assuming that the net value is still 0.9591 yuan after the expiration on November 4, then investors can redeem it at 0.9591 yuan, the investment rate of return is 9.74%, and the annual rate of return is 16.75%.

So how big is the market risk of buying and holding the fund? Hu Lifeng said that if the net value of the unit of Societe Generale was to fall from 0.9591 yuan to 0.874 yuan, and the arbitrage transaction at maturity failed, then based on the Shanghai Composite Index on April 7, only the broader market fell by 12%, or 161.33 points. When it fell to 1181.63 points, the risk-free arbitrage transaction for the fund industry failed, and the fund position held began to enter a risky state. In fact, according to the dynamic monitoring of the net value of Fund Industrial, its current stock position is about 40% or less. If the net value of the unit on November 14 falls to the current buying price level, the decline in the broader market will be even greater.

How much arbitrage space is there

Hu Lifeng believes that the core idea of the structural arbitrage trading plan is to use the first maturity fund as the benchmark, follow the time value of funds, and calculate the theoretical remaining term rate of return of 54 funds. Compare with the actual remaining term rate of return to tap arbitrage trading opportunities.

With the remaining term yield of the first closed-end fund that expires in its duration--Fund Industrial as the benchmark for structural arbitrage transactions, the subsequent 53 funds will gradually mature in the next few years. The maturity time of the fund has a time interval relative to the maturity time of the fund industry, and this time interval is given a certain "waiting cost", and then the adjusted balance of each fund based on the fund industry is calculated according to the time interval. The term rate of return is then compared with the current actual remaining term rate of return, so as to calculate the structural arbitrage trading space of each fund based on the existence of Fund Industrial, and finally show it intuitively by the theoretical rise and fall of each fund.

He took the example of fund Tianhua as an example. Fund Societe Generale expired on November 14, 2006, 0.60 years from April 7, 2006. Fund Tianhua expired on July 11, 2009, with a duration of 3.26 years. The maturity time of the fund Tianhua is 970 days later than that of the fund Xingye, which is 32.33 months. Funds have time value. Assuming that the monthly expected rate of return of funds is 0.25%, the expected rate of return for 970 days is calculated to be 8.41% (calculated based on monthly compound interest). On April 7, the remaining term rate of return of Fund Industrial was 9.74%, so the theoretical remaining term rate of return of Fund Tianhua should be 18.15%, while the remaining term rate of return of Fund Tianhua on April 7 was as high as 39.26%. The market is paying 21.11% more yield, which is a sign of market inefficiency.

Based on this, it is calculated that the secondary market price of Fund Tianhua corresponding to the theoretical remaining term rate of return should be 0.864 yuan, and then compared with the current price of 0.733 yuan, it is calculated that the theoretical fund Tianhua should rise by 17.87%, while This 17.87% is also the structural arbitrage trading space of the fund Tianhua. According to the same method, the structural arbitrage trading space of the remaining 52 closed-end funds can be calculated.

Attractive 20% increase

"Continue to be firm and continue to go long, any adjustment is a good opportunity to buy." Hu Lifeng is very optimistic about closed-end funds.

Hu believes that based on the closing price on December 23, 2005 and the data on April 10, the closed-end fund price has risen by an average of 20%, and has achieved its forecast for the end of 2005. But that's a net-value driven result. The net value of closed-end funds has also risen by 20% this year, so the true independent market of closed-end funds has not yet begun. So far, the market is still healthy, conservative, cautious, and there is no internal structural market.

"According to the benchmark on April 10, closed-end fund prices will continue to rise by an average of 20% this year." Hu Lifeng raised his future forecast again.