Closed-end Funds and Turnover Restrictions
Fordham University - Graduate School of Business
City of London Investment Group PLC - Quantitative Management Limited
Montclair State University - School of Business
Financial Analysts Journal, Vol. 58, No. 3, May/June 2002
Past studies have found that investors can earn higher returns than a benchmark by purchasing shares of closed-end funds with discounts or selling shares with premiums. These studies either ignored the impact of transaction costs or used equally weighted portfolio strategies without controls on turnover or transaction costs. We examined whether constraining the holdings of individual funds and turnover has any bearing on the excess returns earned by closed-end equity funds over a benchmark return. We found that when transaction costs were low, portfolios with frequent rebalancing and loose turnover constraints outperformed the benchmark and other portfolios in the period we studied. We found, in contrast, that when transaction costs were moderate to high, portfolios with less-frequent rebalancing and tight turnover constraints outperformed the benchmark and other portfolios. The implication for the portfolio manager is that excess returns may be achieved in a variety of trading-cost environments with the proper mix of policy variables.
Accepted Paper Series
Date posted: August 20, 2002
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