Wednesday, December 29, 2010

Playing Distributions in Closed End Funds

It's a year end. And it's time when Closed End Funds (CEFs) are making their yearly distributions. Many of these funds also have dividend reinvestment plans for some investors.
Sometimes funds had a good year and distributions are significant. In this case, price of shares on the ex-distribution date goes down about the amount of the distribution. But, if fund has a dividend reinvestment plan, fund management has to buy back shared in the open market to make those distributions. Usually CEF just can't issue new shares, that's why they have to buy them back in order to make DRIP distribution.
I had some experience playing big distributions before. Usually you need to look at a drop of 5% or more, otherwise market noise kills any profit.
OK, this is the theory. I made my first practical move today: bought shares of Morgan Stanley India Investment Fund (IIF).
I'm going to sell shares when they recoup between 30% and 50% of the price drop.

Full disclosure: at the time of publication author had a long position in IIF. Positions can change any time.

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