A conversation about closed-end funds with a man who should know.
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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 31/2‘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 management charges? They get one-half of one per cent of total assets every year and two and one-half per cent of all income off the top. I figure they’ll have to do one per cent better than a customer who just went out and bought a AAA bond to return the same amount of money.
C. K.: No sweat, G.I. They’ll have a lot of money to deal with, and when you have a lot of money, you get to see a lot of really good private placements. Why, when I was at Four Seasons we placed an issue of convertibles privately at three per cent above AAA bonds. Them that has, gets it, my boy.
C. M.: But it doesn’t seem fair to me, Chicken, that shareholders have to specifically request to have their cash dividends paid out. If they don’t, the dividends will be automatically reinvested in additional shares. Shouldn’t that be the other way around?
C. K.: Not at all. If they thought it was good when they bought it, they should let their dividends buy more. After all, you can’t get too much of a good thing.
C. M.: Yes, but these are income funds. If a customer wants to put money away for income, surely he wants to receive the cash to spend, not additional shares which he can’t spend?
C. K.: You must recognize that investment objectives change, sometimes very rapidly. A customer may think he wants cash dividends, but if he fails to reaffirm this with his broker, perhaps his subconscious is telling him that his investment objective was all wrong in the first place.
C. M.: I never looked at it like that. But what about this disclaimer in the prospectus: ‘The agreement provides that the Investment Manager shall not be liable for any error of judgment or mistake of law or for any loss suffered by the company….’ This doesn’t cover willful malfeasance, bad faith or gross negligence, of course, but isn’t that like opening the barn door while the horses are still there?
C. K.: Confucius say: A captain must go down with his ship, but that don’t apply to money managers.
C. M.: There’s one other thing. I don’t want to sound crass, Chicken, but I’ve been worried about putting my customer’s money into these deals because it is locked away forever. I’ll never earn another commission on that money. What are retail brokers to live on?
C. K.: Faith, baby. You got to prospect. When I sell a Subaru, I know I ain’t ever going to see that guy again.
C. M.: At least these new deals get some of the money management away from Wall Street and New York City, and I think that’s healthy. One of the biggest new funds will be managed in Philadelphia.
C. K.: Philadelphia always reminds me of Osaka. I spent a week in Osaka one Sunday afternoon.
C. M.: Come on, Chicken. Be serious. Do you or do you not think the new income funds are good investments?
C. K.: I’ll tell you this: If my mother were alive today, I’d tell her to buy some.
I thanked Chicken and returned to my office. I systematically destroyed all the prospectuses on income funds on my desk. I told every customer I talked to that I wouldn’t buy him a closed end income if he pulled a gun on me.
“Torture me,” I said, “but I still won’t enter the order.”
Chicken Kurasawa is one hell of an analyst. You just have to know how to use his recommendations.