Banzai Chicken!

A conversation about closed-end funds with a man who should know.

WHEN I’M CONFUSED ABOUT AN investment decision, I always turn to some older, wiser head for counsel. My particular oracle is a likeable old Japanese gentleman named Chicken Kurasawa. Although Chicken is more scrutable than most, he carries in that wizened head a wealth of experience and knowledge that makes him seem more Oriental than Confucius.

Chicken is known far and wide as the world’s oldest living veteran kamikaze pilot. He flew 27 kamikaze missions during World War II, and it was not altogether his fault he never paid the last full measure of devotion to family and homeland.

“Sometimes I have too many saki toasts to kamikaze mission and miss the target and ocean, too,” he said.

On his last mission, his squadron leader rigged his plane so the landing gear fell off after he was airborne. Chicken made a pass at an American destroyer but wound up pancaking to a landing on a small deserted island in the Pacific where he waited for the war to end. For reading material, he found a library of books on the stock market left by the previous inhabitant who had decamped to the island after the 1929 crash. Chicken spent the years studying the American stock market and eating papayas.

Chicken didn’t find out the war was over until the late 1960’s when a second unit crew showed up to shoot backgrounds for Gilligan’s Island. He had already been lionized in Japan as the last kamikaze pilot to die in World War II, so Chicken decided to take his expertise on the stock market to the United States.

Since he bore a faint facial resemblance to Jerry Tsai, he was welcomed with open arms. He had his pick of Wall Street jobs, but settled in as portfolio manager of Enterprise Fund. After establishing his reputation as a money manager, he moved over into the brokerage business as partner in charge of back office operations at Goodbody. Having left his imprint there, he became, for a brief period, supervisor of accounting for Four Seasons Nursing Homes. His last job in the securities business was right here in Texas as chief trust officer of Sharpstown Bank.

Tiring of the constant pressure of the securities business, Chicken has moved on to other endeavors, but he maintains an interest in the market and is willing to share his acumen with struggling brokers and analysts if they will seek him out.

I wanted Chicken’s advice on a group of new investment vehicles that are generally called closed end income funds and that are just now making their debuts on the great Wall Street proscenium. They are sponsored and managed by large insurance companies and other professional money management firms. They have individual peculiarities, but most have a common framework: Public investors turn over their money to the company to manage for income first and capital appreciation second by buying shares at a one-time public offering. The pool of money raised becomes a closed end investment trust, and the shares then start trading in the after-market like any other stock. There is no redemption at net asset value. Shareholders must sell their shares to someone else in order to recoup their principal, which may be increased or decreased, according to demand. Income, however, is distributed monthly so each shareholder can enjoy getting a check from the fund along with his light bill.

I knew Chicken would be familiar with this vehicle. He is still a keen student of developments in the securities business. I went to see him at the Subaru dealership where he has led the sales force for three months in a row.

Customer’s Man: Hello, Chicken. How’s it going?

Chicken Kurasawa: Everything’s copacetic. How about letting me sell you a car? These Subarus are something else.

C. M.: Aren’t they kind of small?

C. K.: I’ll tell you something confidentially. These cars are really cockpits. Someday the call will go out from the factory to come pick up wings, fuselages and motors and my oId kamikaze squadron will fly again.

C. M.: All kidding aside, Chicken. I need some advice. What do you think about the new closed end income funds? Should my customers buy them?

C. K.: Absolutely! The new income funds may be the best investment vehicle since the Teledyne’s convertible 3 1/2’s of 1992.

C. M.: Do you really think so?

C. K.: I’ll bet if President Nixon had any money, he’d buy’em.

C. M.: But a couple of things have been worrying me. Can you explain them to me?

C. K.: Shoot!

C. M.: There is much pressure being put on brokers to sell these things on the offering. When demand builds up on the offering, they simply increase the number of shares to satisfy it. My question is: If we soak up all the demand on the offering, who’s going to buy shares in the after-market to make the stock go up?

C. K.: That’s very simple. At any given time there are many investors away on vacation. When they return, their brokers will tell them what a good deal they missed, and they will rush out to buy in the after-market.

C. M.: But brokers get $1.50 per share commissions on each $25 share sold on the offering and only 45 cents per share at the same price in the after-market. Won’t brokers simply ignore the previously offered stock to concentrate on the next underwriting? There must be a dozen of these things coming.

C. K.: Do you think brokers are nothing but venal, commission hungry salesmen? In my old kamikaze squadron there was the willingness to die for what is right. Is it not so with brokers?

C. M.: Okay. But what about the underwriting spread on these issues? A customer pays $25 for the stock, but $2 of that goes for the commissions and underwriting costs. That means there’s only $23 to invest for income.

C. K.: Everybody’s got to live. Besides, for that $2 the customer gets really professional management like we used to have at Enterprise Fund.

C. M.: But what about the fees that

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