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. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Tactical Trading

    A style of investing for the relatively short term based on anticipated ...
  3. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  4. Gross Exposure

    The absolute level of a fund's investments.
  5. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  6. Return Over Maximum Drawdown (RoMaD)

    Return over Maximum Drawdown (RoMaD) is a risk-adjusted return ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!