Central Securities (AMEX:CET) is a closed-end fund trading at a substantial discount to its net asset value despite a superior long-term track record of outperforming the market. (For more information about closed-end funds, check out (Open Your Eyes To Closed-End Funds.)

The market value per share as of October 3 was $21.40, a 15.34% discount to the net asset value of $25.28. The fund's return has beaten the index benchmark on a one-, five-, 10-, 15- and 20-year basis.

Central NAV Return Central Market Return S & P 500 Return
One Year 9.4% 9.9% 5.5%
Five Year 18.8% 19.3% 12.8%
Ten Year 9.6% 7.8% 5.9%
Fifteen Year 14.8% 15.4% 10.5%
Twenty Year 14.7% 16.2% 11.8%
Data as of market close 12/31/2007

A closed-end fund is different than the usual mutual fund that investors are familiar with because it issues a fixed number of shares and trades on an exchange with real-time trades during the day.

Plymouth Rock
Most of the fund's outperformance can be attributed to its holdings of the Plymouth Rock Corporation, a privately held company that offers auto insurance in Massachusetts. Central Securities purchased this investment in 1982 and has held it ever since. Its cost basis is $2.2 million and it was valued at $140 million at the end of the second quarter. It is the fund's largest holding at 21% as of June 30.

The top-five holdings of the fund aside from Plymouth Rock are:

  • Murphy Oil (NYSE:MUR) – 6.1%
  • Agilent Technologies (NYSE:A) – 5.2%
  • The Bank of New York Mellon (NYSE:BK) – 4.9%
  • Brady Corporation (NYSE:BRC) – 4.7%
  • Convergys Corporation (NYSE:CVG) – 4.0%

Sometimes Cheap, Sometimes Not
The fund has not always traded at a discount to its net asset value. In September 1997, it traded at a premium of 0.27%, but for most of the last 15 years it has traded at a discount to net asset value as high as 25% in March 1999.

Investors should note that regulatory changes are under way in the Massachusetts auto insurance market. Last year, the Massachusetts Division of Insurance introduced a system of managed competition for auto insurance rates, transitioning from the old system of fixed rates set by the state. These actions may have the effect of reducing profitability for Plymouth Rock, which would hurt the return of Central Securities.

Investors have long debated why closed-end funds that hold mostly publicly traded equities could trade at a discount to the value of these equities. The supply and demand for the fund shares, strength of management and expecations on future performance have been cited as factors. Central Securities is a special case in that 21% of its net assets are in a private insurance company that does not have a closing price to factor in on a daily basis.

Some activist hedge funds have adopted a strategy of buying stakes in closed-end funds and trying to get them to convert to open-end funds, and benefiting from the market value converging to the net asset value. (Hedge funds are a popular topic these days. For those interested, check out Activist Hedge Funds.)

Bottom Line
Central Securities is a closed-end fund that trades at a 15% discount to its net asset value and has a long-term record of superior performance.

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Mutual Funds & ETFs

    The Democratization of the Hedge Fund Industry

    The coveted compensations of hedge fund managers are protected by barriers of entry to the industry, but one recent startup is working to break those barriers.
  3. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  4. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  5. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Financial Advisors

    Are Alternatives Right for Your Portfolio?

    Alternative investments are increasingly making their way into retail investors' portfolios. Are they a good fit?
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  2. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  3. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  4. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>
  5. Can foreign investors invest in US hedge funds?

    U.S. hedge funds are open to accredited investors. When they distribute profits to investors, those proceeds are taxed at ... Read Full Answer >>
  6. Do hedge funds manipulate stock prices?

    Some economics professors think there is evidence of manipulation of certain stocks by hedge funds on key reporting days. ... Read Full Answer >>

You May Also Like

Trading Center