SOR - Source Capital

[thepupil]

- CEF managed by FPA since 1968

- PM retired 11/2015, shifting strategy from LO equity to balanced stock/bond mandate w/ value orientation, jointly managed by FPA PM's

- in conjunction with aforementioned strategy shift, they liquidated the stocks and are distributing capital gains of $33.65

-Stock price of $64.5, yest. NAV of $70.5, 91.4% of yesterday NAV

- 10 yr average discount of 10%

- 0.7% expense ratio, no leverage

 

Buy at $64.5 in an IRA, receive $33.65 on 3/15/2016 to be long @ $30.85. NAV before market change will be 36.85, so you will be creating the fund at a 16.7% discount, not incredibly compelling, but I see no reason for the discount to not close to its historical average of 10%, if not a bit tighter given the cost basis will be fresh so there will be no embedded tax liability.

 

Should the discount widen a bit, will make for a compelling trade.

[CorpRaider]

Interesting idea.  Wow going from one manager for five.  I wonder what the run rate expense ratio will be.  Probably like 1% plus like the other FPA funds instead of the .5 - .6% SOR was running when I've looked in the past.  Never owned this fund, just checked it out a few times and thought it was a neat relatively low cost active option that ran a Munger style strategy (since he and buffett whipped it into shape way back in the day). 

 

Sorry to junk up your thread, but I will probably never again buy a mutual fund in a taxable account.  You look at this distribution and the one that Berkowitz just spit out.  Yikes.

[thepupil]

I've made this a decent position for family IRA at a weighted average cost of about a 9% discount to NAV.

 

Not sure if anyone cares about such a boring trade, but there are worse things to invest in than a balanced fund run by FPA at a 18% break even discount to NAV. If it trades at a 10% discount after the distro, you can make about 4-5% in a month (all else constant), which makes this kind of like a scalable but riskier odd lot tender.

 

You are subject to the post-distribution discount, which may be big, if everyone else is doing what I'm doing and wants to get out at the same time.

 

 

[Picasso]

So it's basically trading at a 2009 level discount to NAV.  If you think we're going into 2008 all over again then this trade isn't for you even though you have some cushion from the NAV discount to a normalized 10% spread.  It isn't unusual to see premiums to NAV and the CEF takes time to trade down during lots of market turmoil so there's that too.  But it also isn't unusual to see even bigger discounts to NAV.  Cool idea.

[thepupil]

- Implied post-distribution discount has narrowed from 18-19% to 12-13% (gross NAV discount 9%-10% to 6.3%) while NAV has grown by about 1.5%, resulting in gross return of about 5% (my lots range from 4-5.5%) over a short hold period (10-20 days).

 

- likely to ring the register tomorrow assuming can exit around a 6% discount to NAV (~12% implied).

 

- nice low-risk, trade that offered okay gross return and eye popping annualized return without any crazy amount of tail/binary event risk (like a merger break).

 

EDIT: Final profit came to 4.25% gross, 83% annualized (not that that is representative of the actual economics of the trade). The profit was split about 2/3 discount narrowing, which was the thesis, 1/3 help from NAV growth.

[thepupil]

should have held out to the payment.

 

Yesterday's NAV $72.04 -  $33.65 distribution of cash = $38.39 NAV, stock at $35.92, a mere 6.5% discount to NAV, compressed very nicely, left a lot of that on the table.

 

[CorpRaider]

Hey Pupil, wanted to circle and and let you know I was scanning Phil Goldstein's CEF (SPE) most recent annual report and he (briefly) talks about this investment, thought you might want to take a gander to compare with your thinking and you know for a little laurel for the pupil.

 

http://www.specialopportunitiesfundinc.com/investor_reports.html