Delivering Yield

Other times, there may be large tax liabilities associated with a closed-end fund. Some of these funds have been in existence for a number of years and are holding assets that may have substantially appreciated. Thus investors might be unwilling in the short term to pay a price for shares that would be in accordance with the fund’s net asset value.

External factors like a lack of awareness among the investing public about the fund–closed-end funds rarely advertise–may contribute to a lack of buyers. Possibly even a company event, like a crucial shareholder meeting, might be cause for a variance between share price and NAV.

In all of these events, YieldQuest will look for a situation akin to the one that developed with the Liberty All Star Growth Fund between 1996 and 1998. In 1996, the fund traded in the range of a 15% to 18% discount to its net asset value. Presumably, YieldQuest clients would receive a call at this time alerting them to the situation. Then, in early 1998, the share price and the NAV came together at about $14 each.

Yet Chitnis warns that it isn’t as easy as looking at graph lines of the NAV and the share price. “There are many times when they are not in accordance and the share price will only decline further from the NAV,” he says. “This is not a free lunch. There is a lot involved in this process.”

Chitnis should know, having spent the last six years plying the strategy. Once realizing the existence of such discrepancies, he began advising his clients while at Gruntal. He then moved to start a group at Oppenheimer based almost entirely on advising clients of these opportunities with closed-end funds. That group didn’t have a specific name, but that changed when he moved his staff to First Union three years ago and began calling his group YieldQuest.

The firm acts much like a full-service broker, charging a commission for the advice and execution of the trade (First Union Securities, based in Richmond, Virginia, is the clearing house.) Chitnis says the fee is 95 basis points on the total investment for those investing less than $5 million per year, 85 basis points between $5 and $10 million, and 75 basis points over $10 million.

He adds that the asset being purchased will not be custodied with YieldQuest or First Union, but rather with whatever firm is providing custody services for the client’s overall account. “If the client had their assets custodied with Schwab, then we will send the security over to Schwab after the trade is completed. The advisor must alert Schwab that a trade is happening in a subaccount and they will then accept it because they have that written authorization from the advisor.”

Currently, all of the firm’s clients are investment advisors, about 120. Of that number, Chitnis says that 50 or so trade very actively with the firm.

Yet despite this unique strategy, Chitnis is quick to emphasize that about 60% of YieldQuest’s business comes from this strategy. The remainder comes from providing general advice and execution on yield-driven instruments. “If you call us up and ask for a good muni we’ll tell you,” he says.