Broker: Do you have a mortgage?
Customer: No.
B: You should consider tapping into that equity for this. The yield is targeted at 9-10%.
C: I don't think that I need any more exposure to the market. In order to get that yield, these guys gotta buy stock, right?
B: The market doesn't go down over the long term.
And on and on. So how does a closed end fund achieve such high yields? It must be very sophisticated, right? Covered calls, leverage, derivatives, right?
Actually, it's all in the press release:
The primary investment objective of the Fund is high current dividend income, with a secondary focus on long-term growth of capital. The Fund seeks to achieve these goals by employing a research-driven approach to identifying companies globally with the potential for dividend increases and capital appreciation.
Good old 'dividend recapture'. The fund buys companies just before they pay a dividend and sells them right after. The dividend gets passed on as yield, and the capital gains/losses, well, you'll have to live with them. As Richie Rich, our resident fund analyst said, "You could put a whole room of MBAs together and they couldn't come up with a stupider idea".
Underwritten and schlepped by Wachovia, Citi and Edwards. $4.4 B raised at 7%. That's a cool $308m in gross underwriting fees. How'd Goldman miss that one?
1 comment:
Well said.
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