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Lust often confused for luster on IPOs


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Dear Mr. Berko:

About two years ago, we bought 2,500 shares of Advent Claymore Global Convertible Securities and Income Fund on the initial public offering at $20 per share. One broker was very bullish because of the high dividend and because he was certain it would appreciate over the coming years. Well, it’s now $5.31 a share, and we are down close to $37,000. That loss is nearly 20 percent of our portfolio. Please tell us what you think we should do with this piece of junk. It is certainly the worst performing issue in our stock portfolio. Do you think we should sue this broker? He gave us a great sales pitch, which is why we put so much money into it. What are our options? Should we sell it, forget it or buy more?

D.R., Port Charlotte, Fla.

Dear D.R.:

Advent/Claymore Global Convertible Securities & Income Fund (AGC-$5.75) is a closed-end fund that trades on the New York Stock Exchange at a demeaning 13 percent discount to its $6.64 net asset value. This “thing” went public at $20 per share in May 2007. I feel bad for the suckers who bought it at the initial public offer of $20 per share — they are certainly having a painful “out of money experience.” Those investors have a 14-point loss. During their two years of ownership, the dividend has been reduced three times from 14.6 cents a month to 9.5 cents a month and recently to 6.6 cents a month.

Your broker, who pocketed 90 cents for each of the 2,500 shares he dumped on you, a total of $2,250, was eagerly willing to take you for a ride because you were eagerly willing to pay the fare. That broker got you so excited about the dividend and the “significant” potential price appreciation that you neglected to follow Berko’s Rule No. 74: “Never buy a closed-end fund at the initial public offering price.” It’s estimated that nearly 100 percent or more of new closed-end funds drop markedly in price within 90 days after their IPO. You also failed to follow Berko’s Rule No. 52: “No stock should ever represent more than 12 percent of your assets.” AGC represented 23 percent of your stock portfolio, and that’s not good!

I don’t know of another closed-end fund that trades at such huge discount to net asset value. AGC has $367 million under management, 47 percent of its portfolio is leveraged with an average annual interest cost of 5.2 percent. Considering the poor skills of its portfolio manager, that interest cost should be twice as high. T.V. Maitland, who was director of the convertible securities department at Merrill Lynch, manages AGC’s portfolio. That’s not worth much in bragging rights considering the problems Merrill has been facing during the past two years. Maitland tried to use derivatives to enhance AGC’s performance, but it’s painfully obvious that he didn’t learn from his mistakes at Merrill Lynch.

Certainly, a price crash from $20 to $5.75 represents a uniquely and nearly unprecedented poor performance. Frankly, I doubt that AGC and its team of idiots can do much worse during the next two years. So I suggest that you sell your 2,500 shares immediately, and “at the market.” Then I want you to buy those 2,500 shares back 31 days later because there’s better than a far-fetched possibility that you can turn a sow’s ear into a silk purse.

The monthly 6.6 cent dividend is an annual payout of 79 cents, and that’s a 13.9 percent current yield. About 45 percent of AGC’s convertible bond portfolio is invested in financial and health care issues, while 79 percent of this portfolio is rated BBB and lower. I suspect most of those portfolio issues are about as low as they will go.

Selling your shares would give you a $37,500 tax loss. However, over the next 18 to 24 months, I believe many of the portfolio’s issues can improve in value and that AGC shares could trade between $12 and $14. This might be a prudent speculation. While you’re waiting for a recovery, you will be getting an attractive 13.9 percent dividend return that you should reinvest every quarter. Where else can you buy a portfolio of 50 or 60 issues trading at a 13 percent discount to net asset value, or 87 cents on the dollar, and earn a 13.9 percent dividend return while hoping for potential price appreciation.

You’ve just learned an expensive lesson about closed-end funds. So the next time a broker calls to sell you a closed-end fund via an initial purchase offering, put your laser printer on stun and e-mail him a loud NO!

I like closed-end funds. I own several, but I’ve never purchased one at an initial purchase offering price, which has a huge 5 percent commission folded into the share price. Meanwhile, you can sue that broker, but a responsible attorney will tell you that you’re wasting his time.

Yep, it’s a big loss for you and an expensive lesson. But if you continue to invest in the stock market, you must accept the fact that some days you’re going to be the pigeon, and other days you will be the statue.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2009 Creators Syndicate Inc.

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