When Closed-End Funds Buy Back Shares (CHN, FXI)

The China Fund, Inc. (NYSE: CHN) is a closed-end mutual fund rather than an exchange-traded fund.  It also has traded in a sloppy manner where the fund often tracks its net asset value considerably.  This net asset value tracking is generally the key difference between closed-end funds and ETF products.  Now the fund is trying to do something about this.  The Closed-End Fund Association is showing that the current discount to net asset value is -11.59% and that the average discount over the last year has been more than -15%.

Today came word that the fund’s board of directors has approved a Discount Management Policy whereby the fund will repurchase its common shares in the open market.  Details call for the purchases to be “on any day that the Fund’s shares are trading at a discount of 8% or more from net asset value the prior day and there is a daily average discount of 8% or more from net asset value over the five-day period ending the prior day.”

As far as when this will start, it is listed as being the month after stockholders have approved the proposed arrangements for the fund to be managed by RCM Asset Management Limited.

When it does repurchase shares it intends to do it “to the maximum extent permitted by law unless the fund’s investment manager determines that such a repurchase would be detrimental to the fund and its shareholders.”

The Fund is authorized to repurchase up to 10% of its common shares outstanding in any fiscal year.

Shares are up almost 3% at $23.32 on the news and the 52-week trading range is $19.75 to $32.78.  We have also seen some 450,000 shares traded at mid-day and the average volume is only about 80,000 shares.  To show how different this is in performance, the key ETF called the iShares FTSE China 25 Index Fund (NYSE: FXI) is down 1.6% at $36.63 and it has an average daily volume of over 16 million shares.

JON C. OGG