1 XVII. Closed End Mutual Funds

2 Total Assets (Millions) 1993 $118, $113, $135, $142, $148, $152, $142, $136, $139, $156,394 5 Yr Annual Growth0.98% 5 Yr Annual Growth in Domestic Stock3.65%

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6 UNREALIZED CAPITAL GAINS MANAGEMENT FEES TRANSACTION COSTS POOR MANAGEMENT PERFORMANCE DIFFERENCES IN SYSTEMATIC RISK SMALL INVESTOR SENTIMENT

7 Expense Ratios ClosedOpen All All Domestic All Foreign All Bond All Stock Domestic Stock

8 Turnover ClosedOpen All6496 All Domestic7391 All Foreign44109 All Bond79110 All Stock3283 Domestic Stock6684

9 1.Chopra, N., Lee, C., Shleifer, A., and Thaler, R.H “Yes, Discounts on Closed-End Funds are a Sentiment Index.” Journal of Finance 48 (June): Chopra, N., Lee, C., Shleifer, A., and Thaler, R.H “Summing Up.” Journal of Finance 48 (June): Lee, C., Shleifer, A., and Thaler, R.H “Investor Sentiment and the Closed-End Fund Puzzle.” Journal of Finance 46 (March):

10 SMALL INVESTOR SENTIMENT STORY 1.SMALL INVESTORS INTRODUCE ADDED RISK TO STOCKS THEY OWN. THIS BECOMES SYSTEMATIC FOR SECURITIES THEY OWN. 2.PARTICULARLY IMPORTANT FOR CLOSED END FUNDS BECAUSE THEY ARE OWNED BY SMALL INVESTORS. 3.DISCOUNT AND CHANGES IN DISCOUNT ARE CAUSED BY SMALL INVESTOR SENTIMENT. 4.CHANGES IN DISCOUNT CAN BE USED TO MEASURE SMALL SENTIMENT RISK. 5.CLOSED END FUNDS SELL AT A DISCOUNT BECAUSE THEY ARE SUBJECT TO HIGH SMALL INVESTOR SENTIMENT RISK.

11 SENTIMENT AND THE RETURN GENERATING PROCESS SENTIMENT AND EXPECTED RETURNS DISCOUNTS ON CLOSED END FUNDS AND EXPECTED RETURNS

12 Base RGP Four Index Model

13 For each fund No funds first 6 months of existence

14 CANDIDATES FOR ADDITION TO 1 INDEX AND 4 INDEX MODEL 1.CLOSED END FUND CHANGE IN DISCOUNT 2.FOUR DIFFERENT INDUSTRY SAMPLES CHANGE IN DISCOUNT (LARGEST INDUSTRIES WITH ONLY FIRMS WITH HIGHEST INSTITUTIONAL OWNERSHIP) 3.CLOSED END FUNDS RETURNS 4.FOUR INDUSTRY RETURNS

15 RETURN GENERATING PROCESS – SAMPLES SECURITIES INDUSTRIAL STOCKS UTILITY STOCKS PORTFOLIOS MUTUAL FUNDS SIZE PORTFOLIOS SIC INDUSTRIES

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20 (3) (4) (5) (6) (7)

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22 95% payout for tax payers Market to book stocks held= 3.9 Market to book of funds = 0.9 Average size of stocks held= 5,572 MIL Size of fund343 MIL

23 CONCLUSIONS 1.CHANGES IN THE DISCOUNT OF CLOSED END MUTUAL FUNDS ARE NOT A SYSTEMATIC INFLUENCE THAT IMPACT THE RETURN OF SECURITIES OR PORTFOLIOS OF SECURITIES. 2.EITHER SMALL INVESTOR SENTIMENT IS NOT A SOURCE OF RISK OR THE CHANGE IN THE DISCOUNT ON CLOSED END FUNDS IS NOT RELATED TO SMALL INVESTOR SENTIMENT. 3.THE DISCOUNT ON CLOSED END FUNDS CANNOT BE EXPLAINED BY SMALL INVESTOR SENTIMENT. 4.THE DISCOUNT CAN BE EXPLAINED BY SOURCES OF RISK THAT ARE WELL ACCEPTED IN THE LITERATURE OF FINANCIAL ECONOMICS.