Portfolio Performance, Discount Dynamics, and the Turnover of Closed-End Fund Managers

Abstract:     
This paper analyzes the time-series dynamics of closed-end fund discounts and their relation to portfolio performance and manager turnover. We find that a fund underperforms its peer group prior to manager replacement, but improves afterwards. We also find that, prior to replacement, the discount initially increases as fund performance worsens, then stops responding to further poor performance. For domestic equity funds, the peer-adjusted discount first increases by about 5%, then decreases by about 3% by the time of replacement. This pattern is consistent with discount changes reflecting investor learning about fund manager skills, as well as investor anticipation of an impending manager replacement. Finally, we find that discount changes reflect past and forecast future portfolio performance among funds without manager replacements. Overall, our results are consistent with a significant component in closed-end fund discounts being related to manager talent.

Keywords: Closed-end fund, manager turnover, discount

JEL Classifications: G14, G23, G34

Working Paper Series