Question

Millennium Investment Company has created Millennium Fund, a closed-end fund. This company has created only one fund. The market price of the share of Millennium Investment Company is larger than the net asset value of the securities in the portfolio of Millennium Fund. Is the share of Millennium Investment Company trading at a discount?

Explain your answer.

Answer 1

Yes it can be said that close ended fund is trading at a discount to market price of assets held by millennium investment company. This is because investors are sceptical about the realization of the value of the asset as well as the distribution pattern that that is being adopted by mutual fund manager.

However there is another perception that a discount to the actual market value is an indication that the company's pocketing out on dividend yield which is significantly higher than the yield of underlying asset class.

The NAV discount to the actual market price of investment held is also an indication that the fund is undervalued and it can be a good investment because the fund is trading at a discount to the actual intrinsic value.