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

45 Pages Posted: 23 Mar 2005 Last revised: 27 Nov 2008

Russ Wermers

University of Maryland - Robert H. Smith School of Business

Youchang Wu

University of Oregon - Lundquist College of Business

Josef Zechner

Vienna University of Economics and Business

Date Written: November 15, 2008

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 Classification: G14, G23, G34

Suggested Citation

Wermers, Russ and Wu, Youchang and Zechner, Josef, Portfolio Performance, Discount Dynamics, and the Turnover of Closed-End Fund Managers (November 15, 2008). EFA 2006 Zurich Meetings Paper; AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=687142 or http://dx.doi.org/10.2139/ssrn.687142

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

Youchang Wu (Contact Author)

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Josef Zechner

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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