I fear this puts me overquota for today, but I'm about to sign off, so...
Sorry, Greg, this doesn't help. Maybe it makes the New York (or Cayman Islands) idiots feel better to be in a dollar denominated asset (the closed-end fund). But the fundamental value of that asset is still tied to the NAV in the local currency of the components in the fund. Thus, when the Thai baht tanks, that lowers in dollar terms the NAV of the assets in the fund. Anybody buying the fund is still sucker bait.
Bye for today. Barkley Rosser On Thu, 08 Oct 1998 17:19:58 -0400 Greg Nowell <GN842 at CNSVAX.Albany.Edu> wrote:
> Rosser suggested that closed-end purchasers were
> ill-informed NY speculators who didn't know better.
> While I have not read, as he has, scholarly articles on
> the closed-end universe, I think the current high
> premia on Asain funds has a better explanation.
>
> To wit.
>
> Foreign investment usually requires TWO asset
> purchases. FIRST the currency, THEN the hard asset
> (stock, etc.).
>
> If I have $1000 at par with 100,000 Baht, and I buy
> stock in Thailand, my situation is:
>
> 100,000B in stock at $1000.
>
> If the stock heads south, say, 20%, my situation is:
>
> 80,000B in stock at $800, ASSUMING the baht is stable.
> BUT IF THE BAHT ALSO DECLINES 50%, my situation is:
>
> 80,000B in stock which to sell I must exchange, gaining
> a value of $400.
>
> A closed-end bond fund eliminates the currency
> uncertainty. I can trade directly in the stock, in
> dollars, without going through a currency conversion.
> I do not need the intervening asset, the Baht, to make
> trades, and this eliminates to some extent the currency
> problem. Thus if what I am interested in is the asset
> peformance without reference to trasnitory currency
> problems (which all multinationals are familiar with),
> I can have a 20% increase or decrease in the
> Baht-denominated performance without having the whole
> thing bollixed up by exchange confusions. It reduces
> currency downside and upside risk, because by trading
> botches of Baht physical capital in dollar
> denominations we can be less wary about the effects of
> currency traders.
>
> Thus it makes sense to me that the Asian funds are
> trading at a premium. Not because they are bubble
> prone--they are all down 30-50% (in dollars) for the
> year and have been punctured hard--but because in
> effect it is possible to put a valuation on the asset
> while separating the currency issue. In other words,
> capital still needs hardworking starvlings to produce
> stuff, no matter what the traders think, and that gives
> value to the underlying assets. For closed-ends to
> trade at a premium is probably not an indciator of
> stupidity, but rather a pretty good quantification of
> how much the current problems in Asia reflect not
> "fundamentals" but the deleterious effects of currency
> speculators.
>
> --
> Gregory P. Nowell
> Associate Professor
> Department of Political Science, Milne 100
> State University of New York
> 135 Western Ave.
> Albany, New York 12222
>
> Fax 518-442-5298
>
>
-- Rosser Jr, John Barkley rosserjb at jmu.edu