Closed End Fund Strategy ranked by discount rate

 In an asset allocation portfolio such as Gibson’s, for each asset class, one can select a closed end fund which is ’very good’ and the discount rate of which is lower than its average discount. Substitute the ‘good’ closed end fund for the old one if certain conditions are met.

1) First Calculate the 3 year average discount rate of the closed-end fund held. If that CEF’s discount rate is 20% above its average, consider substituting a better CEF for it.

2) Use a 3 year (or 5 year) Sharpe ratio and find the top 2-3 with highest Sharpe within that asset class to find the ‘very good’ fund. The Sharpe is calculated using CEF’s NAV, not the market price.

3) When the discount rate of the ‘very good’ fund is 20% below its 3 year average discount rate, sell the original CEF within the asset and buy in the ‘very good’ fund.

See Also

1. Gerald Appel, Opportunity investing, Chapter11 How to Get the Most From Closed-end Funds P283-300

The book is avaible from Amazon:

http://www.amazon.com/Opportunity-Investing-Advance-Decline-Inflation/dp/0131721291/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1201225463&sr=8-1

2. A Random Walk Down Wall Street

This book is avaible from Amazon:

http://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338/ref=sr_1_1?ie=UTF8&s=books&qid=1201243194&sr=1-1