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|
|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.
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.)
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.