Everybody needs an angle for their business, and perhaps no one knows this better than Jay Chitnis, managing director of the yield-driven investment advisory firm, YieldQuest.
Chitnis and his group of six colleagues will give advisors expert advice on any yield-driven instrument in which they are interested–closed-end funds, municipal bonds, mortgage backed securities, or just corporate bonds. Yet along with this advice and executing trades for clients (wholly investment advisors and financial planners), the firm has come up with a unique approach to bond investing.
In 1995 Chitnis, then a broker with Gruntal & Co., discovered something peculiar about the net asset value of closed-end bond funds and the actual trading prices of their shares.
“It just didn’t seem to fit that a closed-end fund focusing on bonds would be trading at one price today and then at a much higher price only a short time later,” Chitnis says. “It’s not supposed to work that way.”
Six years later Chitnis has made this discrepancy the primary component of YieldQuest’s services. In addition to providing advice on yield-driven instruments, clients will frequently get a call from YieldQuest alerting them to opportunities when the net asset value of a closed-end fund has swung drastically out of proportion with its share price. Assuming the advisor agrees to purchase some shares of the closed-end fund through YieldQuest, the firm will then monitor the position and send another call to the advisor when the share price has risen more in accordance with the fund’s net asset value.
Since the inception of the Atlanta-based department of First Union Securities in 1998, Chitnis says that it has done about 300 basis points better in annual return than the well-known bond indexes for significant clients. Because the same strategy also applies to closed-end funds dealing in equities, he claims his firm has used the strategy to beat the S&P 500 by a similar amount.
How Do They Do It?
There are several reasons why the share price of closed end funds–both bond and equity funds–would fall so disproportionately (often up to 20%) out of line with the fund’s net asset value.
Since the price of shares in a closed-end fund is determined by market demand, the explanation can be as simple as there simply not being enough buyers in the marketplace to handle the sellers. “These funds can trade at times with no regard to the net asset value,” says Chitnis. “When someone buys or sells shares in a closed-end fund, there is no one telling them they can’t make the trade because it’s not in accordance with the fund’s net asset value.”