Closed End Fund Privitization (TSE:CGI)

Closed end funds are pools of money that are professionally managed and usually have some sort of mandate for a particular investment strategy. What makes closed end funds different is that they have a fixed amount of capital to invest compared to a mutual fund or exchange traded fund (ETF) that can grow or shrink in size. In order to participate in the fund instead of contributing money to it you must purchase shares in the fund on the stock market from existing shareholders.

The advantages of this organization is that the fund fees are generally lower than for mutual funds and a closed end fund can employ leverage if it chooses to (which CGI does). One quirk of closed end funds though is that the price of their shares may deviate from the actual value of the investments owned by each share. One such closed end fund is Canadian General Investments.

Canadian General Investments is managed by Morgan Meighen & Associates (MMA).  MMA had at one time three closed end funds that they managed, but they have been slowly taking them private over the years as they all traded at a significant discount to their net asset value. On Oct. 5, 2011 Third Canadian General Investment Trust was taken private.  And recently Candian World Fund (CWF) has just received news that they are being taken private as well.  If the CWF shareholders vote ‘yes’ on the transaction this leaves Canadian General Investments as the only closed end fund left being managed by MMA.

Looking at the stock chart of CWF we can see what affect the going private transaction has had on the share price. It jumped up from $6.17 up to $9.05 the day the news was released. That is a whopping 46.6% gain. Notably the management is taking over CWF at only 95% of it’s net asset value making them a 5% gain. Normally you would expect that the shareholders of CWF would not want to sell their shares at a 5% discount but given that they were trading at a 38% discount they will probably vote ‘yes’ to the transaction.

I don’t know if MMA will take CGI private or not or what the time frame of that could be. I see it though as a non-zero probability event in the future which would give CGI shareholders a nice profit. Even if this does not happen though CGI is a good fund to invest in anyway. As I write this it trades at a 27.8% discount to it’s net asset value:  It is a professionally managed fund of Canadian and U.S. stocks with a 1% annual management fee.

Disclosure: I own shares in TSE:CGI

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