For years I have wanted to start up a
closed-end investment fund. For those not familiar, a
closed-end investment fund raises investment capital from an
initial group of investors and (unlike open-end funds) does
not continuously offer units to new investors. Once formed,
a closed-end fund does not accept new money on a continuous
basis nor does it allow for regular redemptions at net asset
value. Instead, liquidity is provided by an active secondary
market between buyers and sellers, usually on a stock
exchange.
The attraction of a closed-end fund
from a portfolio manager’s perspective is that it is easy to
manage and can provide greater stability to unitholders,
since this new fund is not faced with major fund redemptions
or huge cash inflows that could distort the portfolio and
force security rebalancing. Conceptually, a closed-end fund
is a portfolio manager’s dream in that he can focus solely
on discipline, investment style and long term valuations.
ABC North American Deep-Value Fund
will concentrate on deep-value investing by purchasing the
best value stocks held in our three ABC Funds. But more
importantly, we will also designate as much as 25% of the
portfolio to micro capitalization stocks (but this fund will
only invest in securities of public companies). These shares
have market capitalizations of $50-100 million and are
smaller than our usual small capitalization company
purchases. In many cases, they attract little or no
investment attention; this fact, I believe, represents an
enormous opportunity. Up to this point, when we have come
across attractively priced micro caps, we have generally
passed over them due to liquidity concerns for our three
open-ended funds.
It is noteworthy that there is little
incremental analytical work involved since, in most
instances, our investigative methodology has already
selected these stocks as undervalued. We regard this new
fund as quite exciting and adding a new dimension to our
present work. Common to our three existing funds, Royal
Trust will act as trustee/custodian and
PriceWaterhouseCoopers will perform the fund’s annual audit.
While somewhat limited, liquidity will
be provided through a “virtual exchange” whereby I.A.
Michael Investment Counsel Ltd. will set up a book of
interested buyers and sellers. At the end of each month, on
a best efforts basis, we will match up these buyers and
sellers at net asset value. In addition, this new fund will
offer unitholders further liquidity through limited annual
redemption of units at net asset value.
In all honesty, the new ABC North
American Deep-Value Fund is not for everyone. Compared to
our existing ABC Funds, this new fund will have a $250,000
minimum rather than $150,000 and will be less liquid. This
new fund will have a longer term investment horizon. The
management fee, while lower at 1%, will also include a
performance fee of 20% on any returns above 10%.
On the positive side, this new fund
will have maximum flexibility to invest in a diversified mix
of deep-value Canadian and American common shares,
convertible debentures and fallen-angel unit trusts. The
country and asset mix as well as the currency exposure will
have no set limits. As investment manager, we will have
maximum flexibility and opportunity.
As a measure of my deep personal and
professional commitment, I will be the first investor. I
will commit $1 million to the start-up of the ABC North
American Deep-Value Fund.
Irwin A. Michael, CFA
