Archive for July, 2011

Literature review

July 27, 2011

 

Literature Review on

  BIOCOMPATABLE INTRAORALTHERMOELASTIC MATERIAL (BITEM) AS AN OBTURATOR PERMANENT SOFT LINER FOR HEMIMAXILLECTOMY PATIENTS

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Biocompatable Intraoralthermoelastic Material (BITEM) as an Obturator Permanent Soft Liner for Hemimaxillectomy Patients

1.1       Introduction

Hemimaxillectomy patients suffer a number of complications and difficulties including pain, predisposition to hypernasal speech, impaired masticator roles, and leakage of fluid into the nasal cavity as well as lack of maxillary support, stability, and retention.[1] The maxillary defect may be attributed to congenital malformation or acquired defects that may originate from malignant neoplasms, trauma, pathological changes, disease or surgical treatment of malignant growths. To correct their palatal defect, an obutrator may be used to close an edentulous mouth or the palatal defect.[2] [3]One substance commonly used as an obutrator and soft liner in a bid to rehabilitate such defects is biocompatible intraoralthermoelastic material (BITEM), commonly known as versacryl. This is a unique versatile acrylic substance that has been of innovative use in denture system to improve stability, retention, comfort, and esthetics.  BITEM may be used in two forms: (a) in one form as a hard denture base; (b) in the other form as a permanent soft-lining substance with dentures.  This review focuses on the use of BITEM as permanent soft-lining material and obturator for hemimaxillectomy patients.

1.2       BITEM, its Nature and Properties                                                     

BITEM (or versacryl as it is commonly known) is an acrylic heat-sensitive and multi-purpose material commonly used to make dental appliances and materials in order to enhance patient retention, comfort, and esthetics.[4] Understanding the properties of BITEM is central to appreciating why it can be of varied dental application. There are four interrelated properties that make BITEM of versatile application in dentistry. First, the material is acrylic, the same material that makes up dentures; thus, it can easily bond with dentures and acrylic substances without seams and edges. [4] Secondly, it is thermoplastic in nature, allowing it to soften when subjected to heat.[4] After polymerization, BITEM retains its thermo-elasticity; being softened in warm water, making it easily adaptable to the teeth and soft tissues. Thirdly, BITEM is consistency-controllable, so that its hardness or softness can be determined well in advance by varying the proportions of the hardeners and softeners added to it.[4]  Owing to this room for range of hardness and consistencies, it becomes easier to come up with a BITEM that fits the use that is intended (whether as a soft-liner or hard denture base). Finally, BITEM has a very unique memory in the sense that it always automatically resumes its original shape on cooling.[5]

1.3       Soft-Liners and Obturators: Meaning, Importance, and Appropriateness

A permanent soft-liner may be defined as a layer of material fitted to a denture’s surface and that rests next to the oral tissues.[5] A soft-liner in this case acts as a shock absorber and a cushion between the gums and the denture’s hard plastic base. For hemimaxillectomy patients, soft-liners may be used to fabricate new dentures or they may be placed in the dentures that already exist.  Permanent soft-liners may be used to provide increased relief and comfort in the event that the patient has gum tissues and gumsand that are chronically sore. They may also be fixed when the gum tissues have been severely receded or flat to the extent that they are not able to tolerate the stress exerted on the dentures. Soft liners may also be of value where gums have sharp or prominent bony areas. A major advantage of using soft-liners is the significant comfort that they bring to the denture wearer who would otherwise suffer chronic discomfort.[6] For those who wear soft-liners, due regards must be given to the use of proper cleaners and appropriate home care as well as making follow up visits with a qualified dentist.[6]

            An obturator refers to a plate or disc, whether natural or artificial, which closes a defect or an opening of the maxillae that results from a cleft palate or due to the removal of maxilla (partially or totally) for a tumor mass.[7] Beumer III et al.[8]  have pointed out that obturators play two central roles to the rehabilitation of a maxillectomy patients  namely: (a) restoration of mastication functions, speech, and deglutition and (b) achievement of a normal appearance (oro-facial appearance). The importance of obturators should be understood against the background of the goals of rehabilitating maxillectomy patients (whether total or partial). Wang[9] identifies the following such objectives: separation of nasal and oral cavities to facilitate adequate  articulation and deglutition; setting up support for the orbital contents in order to prevent diplopia and enophthalmos; supporting the soft tissue so as to bring back  mid-facial contour and to ensure a desirable aesthetic results.

1.4       BITEM as a Soft-Liner and Obturator Material  

The features of BITEM discussed above (its acrylic nature, ease of bonding with dentures and tissues, thermo-elasticity, consistency-controllable nature, and memory) make it appropriate for varied dental applications, including making soft-liners and obturators.[4,5,6] Once modeled into the desired shape based on where it is to be used, BITEM will be softened under water, and gets inserted and adapted to the desired maxillary part. Once in the mouth, the BITEM will cool down to the body temperature thereby taking the shape, rigidity, and function desired. Where the patient is not comfortable, all that is needed to be done is to heat the BITEM, remove it, and make necessary adjustments with an aim of realizing maximal comfort to the patient. It is through this way that BITEM becomes a vital material fulfilling the function intended, be it as a soft-liner or as an obturator.

Depending on the use and the part of denture to be adjusted, BITEM’s consistency is pre-determined by adding an appropriate ratio of hardeners and softeners to furnish the material with a full rigidity ranges: from very soft when heated to hard when cooled.[6]  Where BITEM is to be used as a soft-liner, pre-determination should be at body temperature (while in the mouth); it will be soft enough to conform comfortably to the gums and yield cushions. The same applies if it is to be used as an obturator. In either case, owing to the possession of internal memory by BITEM, it is important to ensure that the body temperature is used as the reference temperature upon which the desired shape, rigidity, and firmness will be realized.[6] The shape that BITEM takes at this temperature ought to be deemed as the original shape to which it will return after heating. This will allow the resulting liner or denture to stabilize without causing discomfort after inserting.

It should also be noted that the use of BITEM as a soft-liner obturator material allows room to adjust the parts of denture with the material by simply using warm water. [5] In the course of making liners, the same material may be used to create sublingual wings by the use of versacryl-lock made by the same material.[3] Versacryl-lock refers to the wing-like BITEM material designed to fit under the tongue on the lower dentures inside wall.  The essence of employing versacryl lock is to buttress the stability of the lower denture without undue discomfort.

1.6       Clinical Efficacy of BITEM as an Obturator Permanent Soft Liner 

A number of materials, including acrylic and silicon materials, have been used to make soft-liners and obturators. [2][10] Clinical efficacy of such materials has been of major interest of dental researchers.   Acrylic resin, including the BITEM, is widely used to make soft-liners and obturators[10]  much as it is admitted that they are still not the ideal materials for the said functions.[10]

It has been noted that the thermo-elastic nature of BITEM allows it to be soft-heated (say in water) and this makes it to be easily adapted by the teeth and the surrounding tissues which it is supposed to bind with. Further, its uniqueness in memory will definitely allow the material to automatically resume the original shape (which may be set at the body temperature).  The thermo-elasticity, memory, range of consistency, and the ability of the material to bond with other maxillary tissues including the gum, teeth, and other acrylic products have therefore been cited as the core features that make BITEM a suitable material for making soft-liners and obturators for hemimaxillectomy patients.

However, a study has indicated that BITEM soft liners could fail to bond with the denture base owing to adhesive failures. [5] Proper cleaning must also be done to avoid interfering with the fit of the liners. It will be equally important to make follow-up visits to a dentist for purposes of examining whether the soft-liner fits well into the dentures and determine the general health of the patient’s oral tissues.  Where the examinations reveal complications and the patients opts, there may be a need for a professional cleaning of the permanent soft-liners  as well as a detailed education to the wearer on how to maintain the soft-liner and obturators.

The fact that the hardness or softness of BITEM may be manipulated to obtain the desired level of softness at a given temperature makes it possible to come up with a permanent soft-liner with the desired viscoelastic property.[11] The very fact that its visco-elsticity can be consistently varied and pre-determined enables BITEM’S soft liners and obturators to be effective in absorbing and distributing masticatory forces through enhancing a cushioning effect. It has been argued by Murata et al.[3] that viscoelastic properties and durability are the major determinant parameters of materials to be used as permanent soft-liners.  Therefore, owing to a clear visco-elastic nature of BITEM discussed earlier, one may appreciate the clinical effectiveness of BITEM as a permanent soft-liner.

Other studies have sought to compare BITEM and other materials that may be used as permanent soft-liners.[12]  An interesting competition in suitability has been observed between BITEM (as an acrylic material) and silicones.[3]   One study describes BITEM permanent soft-liners as demonstrating visco-elastic behavior while silicon exhibiting elastic behavior. As such, masticatory function happens to be greater and better in dentures that have been lined with BITEM materials (acrylic resins) compared to lining done with the silicon products. Whereas BITEM remains advantageous to the extent that it is that viscoelastic, BITEM has a long term limitation in that it exhibits gradual loss of visco-elasticity with time. [3]Therefore, over time, BITEM, if used as a permanent soft liner, would loss its cushion effect.  Much as silicon also loss elasticity, its loss and therefore cushioning effect tend to be lower than in the case of BITEM. [3] BITEM also have remarkable durability, a positive clinical attribute for permanent soft liners, although from the durability standpoint, silicones are relatively better than BITEM.

Again, the consistency-controllability along with the thermoplastic nature of BITEM may significantly affect the retention that it provides as a soft-liner or obturator as well as the comfort associated with liners. For instance, if the BITEM to be fixed into the dentures is not carefully pre-determined, there are chances that a hard liner may result, causing some irritation to the patient. [5]Similar discomfort may also emerge where one takes ice-cold drink, which would make the soft-liners hard, thus causing discomfort and some times, pain. For such reasons, it has sometimes been suggested that silicon materials be used in making permanent soft liners and obturators.[13] Other attributes that make acrylic products in general (including BITEM) a good material is the very fact that the material is light-weight, can be easily inserted ,and can also be easily removed, as discussed above.

 

 

In a study to investigate the physical and clinical properties of BITEM, Haleim et. al [6] paid regards to mucus membrane irritations, bonding with acrylic denture bases as well as surface textures and hygiene in relation to BITEM soft-liners.  In the study, a population of ten patients was used to investigate the said aspects over duration of six months using fifteen specimens to test each aspect. The study revealed no significant effect of BITEM on mucus membrane irritations and patient hygiene.  The study also revealed that BITEM will generally easily bond with the dentures, although insignificant bonding failure was registered. However, such failure was mainly attributed to adhesive failure.  This study underscored the efficacy of BITEM in being used as a soft liner for the hemimaxillectomy patients, particularly owing to its bonding ability with the acrylic materials and its minimal irritations to the mucus membrane. Going by this study , it is important to pay attention to the possibility of bonding failure and counter it by using the most effective adhesive that is compatible with it and with the patients’ body tissues.

    1.7    Conclusion    

BITEM comes in handy as a solution to making permanent soft-liners and obturators for Hemimaxillectomy patients. Such patients need to be relieved from pain, impaired  masticator roles, and leakage and other complications related to maxillary support, stability, and retention. To a large extent, the material is clinically effective if used as a permanent soft lining material with dentures as well as maxillary obturators owing to its viscoelastic nature, thermo-elasticity, high durability, its ability to retain memory, and consistency controllable nature. These features make it a versatile material that could be manipulated to make a permanent soft-denture liner or maxillary obturator as the clinical conditions and purposes may demand.  Nevertheless, the materials have some limitations including losing its viscoelastic nature with time, a feature that may impact negatively on the cushion effect which is a key role of soft-liners and obturators. Besides, it is relatively less durable, compared to silicon products. The possibility of adhesive failure when the material is used for soft-lining also limits the suitability of this material as a soft liner and a maxillary obturator.   Further research remains necessary to either adapt BITEM to rise to the level of being an ideal soft liner and obturator or to develop an alternative material that may offer ideal permanent soft-liner.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BIBLIOGRAPHY

  1.  Davenport, J.C., Basker, R.M., Heath J.R., Ralph, J.P., Glantz, P.O., & Hammond  P.

‘Indirect retention,’ Br Dent Journal, Vol. 90, issue 3, 2001, pp.128-32.

  1. Mccabe, J.F., Carrick, T.E. And Kamohara, H. ‘Adhesive bond strength and

compliance for denture soft lining materials’, Biomaterials, Vol. 23, 2002, pp.1347-1352.

  1. Murata, H., Taguchi, N., Hamada, T., & Mccabe, J.F. ‘Dynamic viscoelastic

properties and the age changes of long-term soft denture liners.’ Biomaterials, Vol. 21, 2000, pp.1421-1427.

  1. Elawady, D.M. A., Wagdy, M. and Kaddah, A. Evaluation of the effect of conventional and flexible acrylic denture bases on the supporting tissues in maxillary single denture cases. Egyptian Dental Association Journal. Vol. 56, Issue 4.2, Oct 2010,p
  2. El-Hafiz, E. Assessment of tensile bond strength and warpage of two new thermo-elastic acrylic resin materials, (BITEM and experimental acrylic resin). Egyptian Dental Journal , Vol. 50 , Issue 4.2, 2004 , p. 2129.
  3. Haleim,  M. , Kashef,  N.,  El-Ebiary,  M. and El-Din,  N. G. Clinical and laboratory evaluation of a biocompatible intraoral thermo-elastic denture reline material. Tanta Dental Journal. Vol.29, 2006,  pp.13-15.
  4.  ‘The success and failure of denture soft-lining materials in clinical use’, J Dent., Vol. 12, issue 4, 1984, pp.319-27.
  5. Chalian, V.A., Drane, J.B., & Standish, S.M. Maxillofacial Prosthetics. Multidisciplinary practice. The Williams & Wilkins Co., Baltimore, 1971.
  6.  Beumer III, J., Curtis, T.A., & Firtell, D.N. ‘Maxillofacial Rehabilitation.

Prosthodontic and surgical considerations’ in The C.V. Mosby Co., Toronto, 1979.

  1. Wang, R.R. ‘Sectional prosthesis for total maxillectomy patients: a clinical report’,

Journal of Prosthetic Dentistry, Vol. 78, 1997, p.  241.

  1. Takamata, T., Otogoto, J., Kurasawai, & Nagasawa, S. ‘Laboratory Evaluation of

10 Soft-Lining Materials and Some clinical observations’, Matsumoto Shigalku,Vol. 30,

2004, pp. 143-53.

  1. Kimoto, S., Kimoto, K., Gunji, A., Kawai, Y., Murakami, H., Tanaka, K., Syu,

K., Aoki, H., Toyoda, M. And Kobayashi, K. ‘Clinical effects of acrylic resilient denture liners applied to mandibular complete dentures on the alveolar ridge’, Journal of Oral Rehabilitation, Vol. 34, 2007, pp. 862-869.

  1. Kimoto, S., So, K., Yamamoto, S., Ohno, Y., Shinomiya, M., Ogura, K., &

Kobayashi, K.M. ‘Randomized controlled clinical trial for verifying the effect of silicone- based resilient denture liner on the masticatory function of complete denture wearers’, Int. J. Prosthodont., Vol. 19, 2006, pp.  593-600.

 

 

Draft

July 27, 2011

To explore the performance of closed ended equity funds in the United Kingdom during the last 5 years and the discount factor puzzle.

Abstract

The closed-end equity fund performance in the market continues to be a major field of study to many financial market analysts specifically with its association with discount entitled to it. This paper seeks to explore the performance of closed ended equity funds in the United Kingdom over the past five years. Equities generally have high volatility in their return patterns hence the massive interest in their performance study. Very few problems in finance are as confusing as the closed-end equity funds specifically with the discount factor mystery attached to them. Closed end equity fund is mutual fund which normally holds other publicly traded securities. The close end equity fund issues a fixed number of shares which are traded in the stock market. To liquidate the holdings in a fund the investor has to sell the shares owned to other investors rather than convert them with the fund itself for the net asset value per share. The closed-end fund puzzle is the empirical finding that closed end fund shares usually sell at prices not equal to the per share value in the market of assets the fund holds. Although equity funds sell at premium to their net asset values, in recent years the discounts of 10 to 20 percent have been the norm. Premium is defined as (share price-net asset value)/(net asset value) an discount as a negative premium.

This recent increment in the rate of discounts has put the closed end equity fund under heavy scrutiny. The funds which cannot maintain the discounts under agreeable range are at high risk of disappearing.

 

Executive summary

Closed end equity funds in the United Kingdom have had different rates of discounts over the last several decades. The discount at times shows the inability of investors to gains and losses in time to reduce their tax liability. The discount may be affected by the managerial skills, the performance of the fund and the expectations and prospects of a loss. Earlier studies by Dimson and Palleulio have tried to explain the ways to gain from the closed end equity funds. Though there is some evidence of profits, it does not hold enough ground that the methods are highly credible for continuous profits.

 

Introduction

The closed-end fund phenomenon has been a major field of study over the past years as it continues to be one of the most persistent puzzles in financial economics. This has led to the proposition of numerous extensive literature resolutions. Past studies have attempted to demystify this puzzle but have failed to fully do so to contention. A closed-end fund is defined as an investment company which holds the portfolios of different public traded securities under its name. The fund has a fixed market capitalization and the price of the stock has an indirect connection to the value of assets corresponding to each share. The stock prices of the funds are expected to equal the net asset values (NAV) of their underlying portfolios. But, the results of the many empirical studies show that the stocks of the closed-ended funds trade at a lesser price to that of their net asset values. This is considered as a discount which varies with time. To take a case example of the 1970s, most funds in the US traded at a discount of 20% while those in the United Kingdom were at 50% discount (Dimson and Minio-Kozerski, 1999).

Many trials to explain the closed-end fund discounts have been carried out. The 1980s bull market, introduction of the funds with novel objectives and tax-exempt wrappers renewed the interest and focus on the closed-end funds. By the mid 1990s the discount had lowered to 5-10% though in the recent years it has appreciated to 10-15%. There is immense comprehensive provision of survey on the subject up to late 1990s by Dimson and Minio-kozerski (1999). They study extensively issues like liquidity, tax treatment, agency costs which include managerial ability and fees, market segmentation and investor sentiment theory which was first put forward by Lee et al (1991). Theoretically, there is a very strong relationship between managerial ability and the discount on condition that there is no change of the manager. For instance, poor performance results in the lowering of the perception of the investor on the managerial ability. This in turn results in an increase in the discount to entice the investor not to leave. If managers are frequently changed this perception is weakened considerably. Hence the empirical relation between the discount of the fund and the managerial skills will crucially depend on whether the underperforming managers are eliminated and the outperforming ones are retained. They result into the conclusion that “many hypotheses have been suggested to explain the discount, but none seem to solve the closed-end fund puzzle” (p.35).

While the individual discounts of some of the closed-end funds are within the range of the industry average, others have had very severe fluctuations which cannot be related in any way whatsoever to the market conditions. An excellent case scenario is the German fund just after the collapse of the Berlin wall whereby shares moved from a discount to a sustained premium of over 100%. This was contagious as other country funds experienced a decrease in the discount or an increment in the premium though this phenomenon was very much short-lived. (Hardouvelis, La Porta and Wizman(1994)). These kinds of episodes happen on frequent basis and fluctuations in the discount over time, as well across funds tend to be difficult to elaborate. There are numerous factors that may explain the discounts on the closed-end funds. These are; restricted stock or illiquid assets, distribution policy, unrealized capital gain, liquidity of a fund’s shares relative to that of a fund’s stock holdings, agency cost or management expenses, insider ownership, past fund financial records, turnover, price level of shares, proportion of foreign stock owned, fund size and investor sentiments about the stock market. Despite all these studies, very little is known about the determinants of the closed-end fund discounts in the emerging markets. This paper is aimed at demystifying the determinants of the discounts in the closed-end funds traded in the UK stock markets over the last five years.

Massive literature seeks to explain the existence of discount in the closed-end fund market. Financial analysts have put forward four major theories that try to explain the existence of this discount. These are; bias in estimates of NAV (overhanging tax liabilities or illiquid assets); agent costs (managerial dissipation and the present value of the fees of management); explanations based on segmented markets; and the loss of potential tax-timing options. But, not any of these presented theories have been able to fully explain this phenomenon. The recent increase in the average rate of discount in the UK has led the sector to be put under vivid scrutiny. Funds that cannot keep the discount within an acceptable range are at a high risk of closure and recently at least every month in the UK there is a fund announcing wind-up strategies or restructuring arrangements. At the same time there is a number of new floatation of closed-end funds. Established funds that meet a perceived need will survive from disappearance. (Elroy D. and Carolina M. 2002) European monetary union will provide a further opportunity to bring closed-end (as well as open-end) funds to investors all over Europe according to some financial managers.

The above theories have diverged from the efficient market paradigm, and have introduced models based on limited rationality. The closed-end equity funds in the UK are majorly owned by institutional settings rather than private equities. Recently, research that has been carried out on open-end funds show that the fund performance can be measured reliably only in the sense that it is estimated using a factor model of returns. There is now evidence with factor-based performance measures of the managerial performance, often using the raw NAV return as the performance metric. Yet, because of the frequent investment in the limited performance persistence amongst open-ended funds, the discount in the closed ended fund tends to increase. By contrast, researches on the closed- end funds such as Malkiel (1977) and Pontiff (1995) have hitherto gained crude measures of closed end funds by specialized investment of the market, it is highly important for the evaluation of their performance in relation to an appropriate fund specific benchmark be carried out.

All these studies about the closed-end equity funds try to explain the connection between the managerial skills and the discount involved. This helps understand the performance of the equity funds. However these studies have failed to fully explain the presence of the discount in the equity fund markets not only in the UK but around the world as well. The aim of this paper is to further demystify and explain the correlation between the closed end equity funds and the discount factor puzzle in the past five years in the United Kingdom. The most important measures of performance involved in this form of study are the Sharpe measure, the Treynor measure and the Jenson model. The Sharpe measure considers risk entitled to the entire fund and is hence suitable for even small investors as the ordinary investor lacks skills and knowledge to diversify his/her investments.

This research will put into account the data emitted from the London stock market, financial journals and other financial literature materials on the performance of the closed-ended equity funds in the United Kingdom and the discount factor over the past recent years. Although at time equity sells at a premium of their net asset value, discounts of between 10 and 20 percent have been the norm in the recent past. This research study scrutinizes the fluctuations of the discounts in the closed-ended equity funds in the United Kingdom over the past five years. The investor sentiment theory and the managerial skills are put under extensive scrutiny in this paper. The fundamental feature of the closed-end fund is fully put into focus by the investor sentiment theory as compared to open-ended funds in that they carry out discount risks in line with Capital Asset Pricing Model (CAPM), it has to be rewarded to the extent that it is systematic. However, the major shortcoming of this theory is that it does not fully explain the fluctuations of the different discounts on different closed-ended equity funds.

Discounts depict past performance but do not predict future managerial performance. According to Gruber (1996), closed-ended fund prices may include managerial performance prospect, there is no evidence to support this hypothesis. Secondly, in the pricing of these fund terms, the price of the share returns exhibit no persistence in the performance. However, there is weak evidence of price reversal which is majorly attributed to the mean reversion in the discount. Multi-factor regression is used to study and evaluate managerial skills.

The managerial skill can explain that the discount has been revived and not invented according to Ross (2002). According to Gruber, Elton and Blake’s (1996a) study of open-ended funds, there is insignificant evidence in closed-end funds in the persistence of managerial performance. In earlier studies of British closed-end funds, Pontiff’s (1996) findings are rendered credible in that the higher the residual risk of a fund, the more the price of its shares is likely to deviate from the net asset value. Generally, the amount of price a marginal investor is willing to pay for a fund, relative to their net asset per share, will basically reflect the perceived managerial skills; open-end funds are such a good example of this scenario where the price and the net asset value are forced to be equal.

This paper seeks to clarify if the under-performing managers are replaced? How discounts and their dynamics are related to the issue of managerial replacements? And also whether there is a relation between the discounts and performance after there is the control for managerial take-over? There is also the examination of investor sentiments measured by the variation in the discount in the closed-end funds involves the common stocks return generation process if the closed-end stocks are sensitive to this factor significantly Lee et al (1991). A lot of data for analysis is obtained from the London stock exchange. Over the past five years the discount on the closed end equity funds has been varying in the ranges of 10%. No economic hypothesis has got to explain the closed end fund discount leading to the in depth scrutiny of the behavioral trends explanations. This makes the study shift towards the direction of the investor sentiments and its effects on the discount. It led earlier studies to deduce that it is logical that the investor sentiments have an impact on the rate of discount on the closed end equity fund. Manager replacement events may affect the dynamics of the discount. In the UK in the 1960s, the closed-end funds were popular with private investors. Dimson and Mini-Pauello studied earlier theories to details and found that none of them accounts for the closed end fund independently given the notion that the market remains efficient. In the cases where the investors have limited information about the closed-end funds they are likely to be deterred from investment by others who give insufficient prospects about the diminishment of the discount on the fund.

 

Literature review

Close end funds are entailed with a very strange phenomenon in finance which is not easily understood even after the numerous studies carried out on the fund. It is further complicated with the existence of discount in the fund and the behavior of the discount under different circumstances. Shares in the closed end equity fund are issued at premium to the net asset value of approximately 10%. The value of this premium coordinates to the start up fees and the underwriting cost. But, many times within several months the shares trade at a discount. On liquidation (open ending) of the fund, the price of the shares rise and the discount automatically disappears. The question still remains how the portfolio of traded securities starts its life being worth much more than the value of its components, spends a major part of its time being less worthy than its own segment parts and finally ends up at a value equal to its constituents? This paper research seeks to relinquish the mystery that is associated with the closed end fund in the UK in the last five years with assistance from reference of earlier studies. One of such studies is Dimson and Minio-Kozerski (1999).

British closed end equity funds have a lot of structural advantages. They gain majorly from the considerable flexibility and the obligation to distribute at least a minimum of 85% of the dividends obtained from their holdings. The gains from the capital cannot be distributed and hence are reinvested in the fund, and the capital gains have been exempt from corporate taxation since 1980. Most of the UK closed end equity funds often use this opportunity majorly to influence their portfolios. The British closed end equity funds are in some cases very similar to the US equity fund and have gone through similar periods of discounts and premiums.

US funds

Tax and regulatory status restrictions are some of the major challenges experienced in this market, the funds are obligated to distribute 90 percent of the acquired capital gains to qualify for segregation from corporation taxation. These closed end equity funds rarely take on any leverage. But, they have been very much favorable to the investors as they provide major exposure to the complicated and specialized portfolios mostly with a focus on foreign or illiquid assets. Several thoughts from different studies have been put forward trying to make sense and understanding of the discount associated with the closed end equity funds. Though there have been many theories put forward, none of them fully explains the puzzle of the discount on the closed end equity funds. Two majorly important theorems of explanation are miscalculation of the net asset value and existence of agency costs. Due to tax liabilities related to unrealized capital gains, the net asset value may be misestimated or also due to the illiquidity of the funds’ holdings. Malkiel (1977) discovers that tax liabilities can be able to account for discount on the fund of not more than 6 percent. On addition, there is legitimacy that the prices of closed end funds rise on the instance of open-ending (Brauer (1984), Brickley and Schallheim (1985)) does not in any way give credibility of the hypothesis that net asset value is overestimated.

The discount may be termed as a consequence of the investors anticipating managerial dissipation and capitalizing future management fees as it is from the agency perspective. From the study done by Malkiel (1977), there is no evidence of correlation between the managerial expenses and discounts. The theory put forward by Boudreaux (1973) purports that discounts reflect the prospects of future managerial performance. However, later studies do not find any distinct evidence of any important relationship between discounts and the future net asset value performance. There is only a weak relationship as discovered by Roenfeldt and Tuttle in 1973.

Given that taxation on capital losses and gains is levied upon realization and not accrual, the optimal tax trading strategy is to realize capital losses immediately and postpone gains until a forced liquidation (Constantinides 1983, 1984). An explanation of the discount may arise that a portfolio of options to realize gains is more valuable than that of the corresponding portfolio. There is legitimacy consistent with the hypothesis that managed funds refute taxable investors the tax-trading opportunities associated with idiosyncratic movements and variations of the individual security prices in the portfolio (Brickley 1991, Kim 1994). But there is the presence of few investors who trade to minimize their tax payments and others buy and hold stocks for the longer term (Odean 1998).

Many more explanations for the closed end fund discount make their centre of attention to be the various forms of market segmentation. In the international market, closed end equity funds may be affected by the exposure to the market whose equity returns are influenced by a different investor base than that of the local market. Locally, the price of the funds may be set so as to show responses to the managers by the private investors or their sales efforts or the different valuations imposed on these companies by institutions as compared to individuals. However, these theories and forms of study do not fully provide a credible explanation that appropriately solves the puzzle of the discount present on the closed ended equity funds. Careful studies give evidence that profits may be realized from uncomplicated strategies based on the level of the discount (Thompson 1978). The evidence of the inefficiency and unreliability of the US closed end fund market has led to the development of limited rationality model put forward by later schools of studies (Waldmann 1990). They purport that the presence of irrational sentiment of individual investors who are a majority in the US closed end fund markets, introduces an additional noise trader risk on the asset with which they trade. The risk present due this is priced and valued at equilibrium because the variations in investor sentiments are correlated across investors and can never be diversified away. According to Thaler (1991), discount are interrelated with the prices of other securities that are affected by similar investor sentiment for example the small stocks. In 1993, Miller punched holes into the credibility of the sentiment theory by doubting the link between the premium and discount on the small firms. Further research by Swaminathan (1996) shows that, small investor sentiments should not only affect current prices of the stocks, but should also be in a position to forecast future returns and gains of the stock. Reliable evidence is emitted by the empirical results cite that discounts conjecture small firm returns better than they do on the case of huge firm returns.

UK studies

The main aim of this paper is to research on the performance of the closed end equity funds in the United Kingdom during the past five years and the discount that is interjected with the fund market. The existence of the discount despite the many studies continues to be a mystery in the financial market world. Compared to America, British closed end funds are more advantageous. British closed end equity funds have a lot of structural advantages. They gain majorly from the considerable flexibility and the obligation to distribute at least a minimum of 85% of the dividends obtained from their holdings. The gains from the capital cannot be distributed and hence are reinvested in the fund, and the capital gains have been exempt from corporate taxation since 1980. Most of the UK closed end equity funds often use this opportunity majorly to influence their portfolios. The British closed end equity funds are in some cases very similar to the US equity fund and have gone through similar periods of discounts and premiums. In Britain, the majority of the closed-end equity fund shares are owned by institutions hence there is a limitation on the rationality theory.

Studies by Levis and Thomas (1995) give evidence that United Kingdom closed-end equity fund initial public offers are subject to ‘hot’ periods of issue which majorly coincide with a marked minimization of the discounts of the veteran funds. There is much similarity of the aftermarket performance to that of the general equity initial public offers and the long term underperformance is small. A study by Draper (1989) showed that the prices of the UK closed end fund shares significantly react to any news of takeovers, open-ending and liquidation. By the end of the month when all information about the open-ending has been included in the price of the shares, there is no further rise in the stock thereafter. The UK closed end fund market seems to react in haste to the announcement of open-ending of the funds.

Draper puts forward a theory that significantly demonstrates that the post-announcement returns and gains from funds that result in open-end are only realized if mid-market prices are used. In the cases where prices are adjusted to cater for the transaction costs, strange gains do not even approach the levels present in US as stated by Brickley (1985). Further amendment of  discount based strategies theory by Thompson (1978) results in the discount based strategies earning excess returns and rendering results not statistically relevant. It is hence concluded that abnormal returns may be earned by implementing a discount based strategy, though these returns are lesser than the operational costs. With all this study, British analysts and researchers have not yet fully investigated the liaison between discounts and managerial performance.

Managerial performance

The first research that showed the relationship between anticipated managerial performance and the discounts was done by Boudreaux (1973). In his study he purports that persistent divergence of the price from the net asset value is unswerving with the market efficiency and depends on future portfolio changes. The price may be projected to be equal to, or swerve by a constant proportion of, its net asset value only if the markets believes that the fund manager would never change the possessions of the portfolio. Premiums and discount give credible information about the ability of the manager to perform in relation to a dormant investment strategy. By the use of stock-picking or market-timing ability, the eminence of mutual fund management has been investigated extensively.

Studies show that open-end funds, more precisely the aggressive growth funds, show some choosing ability, but no characteristic timing ability. This was defined and accredited by Wermers (1997) using some several benchmarks based on the behavior of the stocks held in their measure portfolio. These characteristics are market capitalization, book to market and prior year characteristics. Bello and Janjigian study the domestic equity open-end funds and account for the affirmative and significant market-timing and security selection abilities. Other studies show that age and average undergraduate institution SAT score may predict the returns. This hence supports the perpetration that some managers may simply be better than others and this somehow influences the rate of discounts on the closed end equity funds stock markets.

From the study by Gruber in 1996, it is evident that investors may be able to identify superior managers and hence direct incremental money to the open-end funds that are better managed. In the cases where finer funds are closed end, it is obvious that discounts are expected to show investor prospects of future managerial performance. In this view, Gruber gives a proposal that funds may trade at a smaller discount or even a premium if the general market anticipates good managerial performance. Though the belief that discounts represent quality managerial skills of closed end funds, the present evidence gives a mystery because, discounts seem to be related to subsequent measures of performance pessimistically. The hard task of finding a connection between closed end fund discounts and the managerial performance highly accounts for reasons why very minimal studies have looked at managerial performance. These leaves the notion that either the interrelation between the subsequent performance and discounts is not present or there is need to adopt more complex methods of analysis in order to identify the connection if any. For instance, if a fund pays more than the ‘fair’ value of the managerial expertise, its share are supposed to trade at a discount and the reverse is true according to the managerial performance theory. By rectification of weaknesses and shortcomings of the traditional definition of fund performance, there is the ability to study effectively and extensively the persistence and predictability of closed-end fund performance.

Berk and Stanton (2007) depict that investors strategically buy new issues of closed-end funds of known fixed life on provision that the expected managerial quality matches the cost of the life of the fund. In the case of seasoned funds, there is the presence of long term managerial contracts meaning cost may not depreciate, but competition may force them upwards if the acquired gains are excellent. This form of study gives support to the rise of managerial fees over time whilst skill remains passive. Seasoned funds trade at a discount on average given the fact that the balance of the skills and the cost is put into great consideration. In the United Kingdom, there is direct contradiction to this theory because the older funds tend to charge the lowest managerial fees. In the year 2006, Gemmil and Thomas try to estimate a cross-section regression for the ratios of expense of 186 conventional closed end funds in the United Kingdom on the grounds of various fund and board behaviors. The results are that both fund age and size have very major negative statistics coefficients. This also showed that in the case where the fund age is doubled, it is purported to add 10% of the expense ratio.

The major view of every research study is that market exaggerates the managerial skill contribution in division and allocation of returns and gains across funds and in turn underestimates the role of luck due to investors’ failure to act rationally on the presented information and their biasness to the information. According to Jain and Wu (2000), mutual funds that boast of past good performance receive more funds even when they have no evidence in superiority in performance in the post-advertisement era. Elton et al. (1989) discover that new issues of publicly traded commodity funds yield profits and returns far below the very high rates projected in the prospectus. Ferguson and Leistikow (2004) argue that a similar phenomenon applies to initial public offerings of green closed-end funds: a manager with unusually good recent performance is chosen whose apparent skill outweighs the amount of cost incurred from his skills and services. Due to the fact that projected superior performance projected is a matter of luck rather than skill, investors subsequently revise downwards their estimate of the manager’s skill, and for this reason seasoned funds tend to trade in the discounts.

It is very much complex to test these explanations of the closed-end fund discount empirically. If the Managerial Skill hypothesis is true, however, in a cross-section of funds those with better past performance should be on lower discounts. According to this theory, a fund run by a manager with exceptional skill would not be expected to fall to the same discount as other funds, so the high perceived skill of the dummies (funds in the UK Smaller Companies sector tend to have higher discounts).

Studies of open-end funds have found significant non-linearity in the relationship between past performance and net inflows, with stronger effects at the higher end (Chevalier and Ellison, 1997; Sirri and Tufano, 1998). These results strongly suggest that perceived managerial skill affects the discount, but they are not sufficient to show that Managerial Skills explain discounts hence the puzzle of the discount on the closed end equity funds and their performance still stands.

The Discount

One important characteristic that sets closed-end funds apart from other collective investment schemes is the mismatch between the funds’ share prices and the value of their underlying investments. The funds are sold in the stock market at a discount or premium to Net Asset Values. Investors, therefore, have two ways of making (or losing) money—from any rise or fall in the value of the underlying investments and from any narrowing or widening of the discount.

The history of the closed-end fund discount and premium shows much preference and liking to this type of market. So far no legitimate theory or school of thought has been put forward to explain the reason why the closed end discount funds most of the times trade in discounts or what affects the rate of the discounts. In the 1960s, the average discount fluctuated around

10percent. However, by the middle of the 1970s, private, as well as institutional, investors had deferred interest in such funds and the average discount in the United Kingdom widened to nearly 50 percent. The bull market of the 1980s and the introduction of new investment objectives, capital structures, and tax-efficient wrappers renewed interest in closed-end funds. By the early 1990s, the average discount (expressed as the logarithm of the unweighted mean ratio of share price to Net Asset Value) had narrowed to around 5 percent. The behavior of U.S. equity domestic funds closely follows the pattern of the U.K. market. During the 1970s, U.S. funds traded, on average, at a discount larger than 20 percent. Successively, the discount progressively narrowed, and these funds now trade at about a 5 percent run of the mill discount. Nevertheless, whereas U.S. closed-end funds are typically a retail product, a high level of institutional ownership exists in the United Kingdom. Two-thirds of the shares in U.K. closed-end funds, on middling, are owned by institutions, and for a majority of the funds, the institutional percentage is much greater than two-thirds (CLL 2001). A great deal of the academic research on closed-end funds has focused on explaining the discount.

Capital structure.

Closed-end funds are characterized by a fixed capitalization. This form of structural layout makes it easier for the investment manager to make long-term commitments. In contrast, open-end funds are characterized by the continual sale and emancipation of their units at or near Net Asset Value, and this at the request of any unit holder. For that reason, open-end funds have a variable number of shares in issue.

Closed-end funds offer a wide variety of financial instruments, and their fund managers recurrently formulate new-fangled ways of providing outlay revelation. Different classes of investment are now on hand. In the United Kingdom, they take account of run of the mill shares, highly leveraged shares (common stock in a company with a wrap up date that is premeditated to give stockholders a highly leveraged return and profit in terms of both capital and income), income shares (securities that are at liberty to the superfluous income after expenses and after the income prerequisite of any prior charge has been met), capital shares (securities that are entitled to the surplus assets on wrap up after repayment of other share classes), zero dividend predilection shares (securities that have a predestined pace of principal augmentation), stepped preference shares (securities with a predetermined growth in both income and capital), warrants, and convertibles.

Even though not many of the U.S. closed-end funds take on any leverage, United Kingdom closed-end funds more recurrently make use of leverage through their own capital structures. The risk of highly leveraged shares is superior, on the other hand, for the reason that borrowing boosts Net Assets Value in rising markets but depresses them when markets plummet. To protect the interests of shareholders, there are precincts on the amount of capital that a company may borrow, but the preponderance of funds function with low levels of leverage, and prior to 2001, the confines in leverage had on the odd occasion been reached. In disparity, open-end funds are by and large proscribed from borrowing money, which implies that unit holders’ interests show a discrepancy directly with the value of their proportionate component of the fund. The tendency by the discount to have leverage increases the fundamental holdings of the closed end equity fund.

In disparity, U.K. closed-end funds are not even a little bit permitted to dispense capital gains but must hold on to them for reinvestment. The capital gains tax on closed-end funds was abridged to 10 percent in 1977 and removed completely in 1980. For that reason, closed-end fund managers can turn over their portfolios without experiencing any capital gains tax legal responsibility. U.K. closed-end funds cannot keep hold of more than 15 percent of dividends received. If the dividend they can hand out to their shareholders is inferior than the most wanted level, they are disallowed from selling fraction of their worth to boost the dividend disbursement.

 Charges

The costs connected with acquiring closed-end funds shares are in general inferior to those for open-end funds. Open-end managers set a preliminary charge of about 5 percent when units are bought. The bid-offer stretch, conversely, is time and again bigger than the first charge. In the United Kingdom, the computation is rigorously proscribed by the Department of Trade and Industry and, in theory, can set out as soaring as 12 percent. In disparity, closed-end funds have no initial organization charge when shares are bought, and the bid-offer spread is on the whole a propos 2 percent. The trade expenses drawn in buying or selling in the course of the investment trust management company can be as low as 0.2 percent, while a full-service stockbroker normally charges 1.65 percent.

Taking into consideration the management charges and bid-offer spread as a whole, the cost coupled with buying and selling closed-end fund shares can be noticeably lower than 4 percent of the initial investment and will never be above 8 percent. With open-end funds, the equivalent costs can be as high as 13 percent.

To explore the performance of closed ended equity funds in the United Kingdom during the last 5 years and the discount factor puzzle

July 27, 2011

 

TO EXPLORE THE PERFORMANCE OF CLOSED ENDED EQUITY FUNDS IN THE UNITED KINGDOM DURING THE LAST FIVE YEARS AND THE DISCOUNT PUZZLE

NAME……………………………………………………………………………………………

INSTITUTION………………………………………………………………………………….

 

 

 

 

 

 

 

 

 

 

 

 

Abstract

The closed-end equity fund performance in the market continues to be a major field of study to many financial market analysts specifically with its association with discount entitled to it. This paper seeks to explore the performance of closed ended equity funds in the United Kingdom over the past five years. Equities generally have high volatility in their return patterns hence the massive interest in their performance study. Not many problems present in finance are as mysterious as the ones in closed-ended equity funds specifically with the discount factor mystery attached to them. Closed end equity fund is an example of a mutual fund which normally has other securities that are traded publicly under its portfolio. The close-ended equity fund offers a constant number in shares which are involved in trading in the stocks market. For liquidation of the holding a fund possesses, the investor has to sell the shares owned to other investors rather than convert them with the involvement of the fund which possesses them for the net asset value per each share held. The closed-end fund mystery is the empirical discovery in that closed-end fund shares usually are sold at prices which are not of the same cost with the value of each share held by the fund in the market. Despite the fact that equity funds are sold at premium in relation to their net asset values, in the period of a few years ago the discounts of 10 to 20 percent have been the usual rate of trade. According to www.moneyworks.ae Premium is defined as (share price-net asset value)/(net asset value) an discount as a negative premium.

This recent increment in the rate of discounts has put the closed end equity fund under heavy scrutiny. The funds which cannot maintain the discounts under agreeable range are at high risk of disappearing.

 

Table of contents

Abstract…………………………………………………………………………………….2

Executive summary…………………………………………………………………………5

1.0 Introduction……………………..………………………………………………………7

2.0 Literature review…………..……………………………………………………………14

2.0.1 US funds………………………………………………………………………………..15

2.0.2 UK funds………………………………………………………………………………..17

2.0.3 Open end funds………………………………………………………………………….19

2.04 Managerial performance……………………………………………………………….21

2.0.5 The discount…………………………………………………………………………….25

2.0.6 Capital structure…………………………………………………………………………28

2.0.7 Charges…………………………………………………………………………………..29

2.0.8 Management contract and fees…………………………………………………………30

2.0.9 Premiums, closed end fund returns, and NAV returns……………………………….30

2.1.0 Portfolio composition…………………………………………………………………….31

2.1.1 Diversification…………………………………………………………………………….31

2.1.2 Liquidity…………………………………………………………………………………..32

2.1.3 Size…………………………………………………………………………………………34

2.1.4 Past performance………………………………………………………………………….34

2.1.5 Market conditions…………………………………………………………………………34

3.0 Methodology…………………………………………………………………………………35

3.0.1 Performance measure of mutual funds…………………………………………………..35

3.0.2 Treynor measure………………………………………………………………………….37

3.0.3 Sharpe measure……………………………………………………………………………38

3.0.4 Comparison between Treynor and Sharpe measures…………………………………..38

3.0.5 Jenson model………………………………………………………………………………39

3.0.6 Fama model………………………………………………………………………………..40

3.0.7 Determinants of discounts on closed end funds…………………………………………41

4.0 Analysis and findings……………………………………….………………………………44

4.0.1 Data sources……………………………………………………………………………….44

4.0.2 Portfolio samples…………………………………………………………………………..44

4.0.3 Index construction and description variables…………………………………………..45

4.0.4 Empirical model……………………………………………………………………………47

4.0.5 Empirical tests…………………………………………………………………………….49

4.0.6 Long run impact of small investor holdings on discount………………………………53

4.0.7 Data sources……………………………………………………………………………….55

4.0.8 Empirical findings…………………………………………………………………………59

5.0 Conclusions and recommendations……………………….……………………………….63

6.0 Reflection……………………………………………………………………………………70

References……………………………………………………………………………………….78

Appendix…………………………………………………………………………………………82

List of tables……………………………………………………………………………………..85

List of graphs……………………………………………………………………………………85

 

 

 

 

Executive summary

The closed-end equity funds in the United Kingdom have had different rates of discounts over the last several decades. The discount at many times occasionally gives evidence of the lack of ability of investors to predict profits and shortcomings in the best time to minimize the ir liability to taxes. The factors that affect the discount are by the managerial skills, the fund feat and the expectations and prospects of a failure. Earlier studies by Dimson and Palleulio have tried to explain the ways to gain from the closed end equity funds. Though there is some evidence of profits, it does not hold enough ground that the methods are highly credible for continuous profits. This study examines the dynamics that are present in the time-series of discounts present in the closed-end equity fund and the relation they have with their portfolio concert and manager earnings. With the case of the replacement of managers the funds performs poorer from its predecessors but later improves and stabilizes.

Additionally, there is evidence that the variations in the discount give a clear citation to the investor about skills of the managers of the fund, also investor expectancy of a future manager replacement in short time. Distinctively, prior to surrogate, the discount to begin with appreciates but the performance of the fund performance diminishes, and then stagnates from responding to further meager performance. In the case of local equity funds, the discount which is peer-adjusted first appreciates by approximately 5%, and then depreciates by a propos of 3% by the time of substitution. In addition there is the finding that discount deviations give a clear view of past and predict prospect portfolio feat in the funds with no case of replacement of managers. On the whole, the consequences are unswerving containing a momentous fraction in the discounts of the closed end funds in the relation to the talent of the manager.

This study seeks to demystify the relationship present between the closed end equity funds and the discount. This is an area studied by many financial researchers and analysts but none has been able to conclusively explain this relationship and interconnection. It is a very wide area to study yet it has very minimal in number of the key areas of focus. The demystification of the closed end funds’ discounts still remains the major area of research of many scholars upto this day.

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 1: Introduction

The closed-ended equity fund phenomenon has majorly been a major field of study over the precedent years as it continues to be a major mystery in the economics of finance. This definitely has led to the proposition of numerous extensive literature resolutions. Past studies have attempted to demystify this puzzle but have failed to fully do so to contention. The precise definition of the closed-end fund is an investment company which possesses holds the portfolios of different public traded securities under its name. The fund has a fixed market capitalization and the price of the stock has an indirect connection to the worth of possessions equivalent to every one share. The stock prices of the funds are expected to equal the net asset values (NAV) of their underlying portfolios. But, the results of the many empirical studies show that the stocks of the closed-ended funds trade at a lesser price to that of their net asset values. This is considered as a discount which varies with time. To take a case example of the 1970s, most funds trading in the United States were at a discount of 20% while those in the United Kingdom were at 50% discount (Dimson and Minio-Kozerski, 1999).

Many trials to explain the closed-end fund discounts have been carried out. The 1980s bull market, beginning of the funds with not realistic objectives and tax-exempt wrappers renewed the interest and focus on the closed-end equity funds. The discount had depreciated by the middle of the 1990s decade to 5-10% despite the fact that in the near-past years it has appreciated to approximately 10-15%. There is immense comprehensive provision of survey on the subject up to late 1990s by Dimson and Minio-kozerski (1999). They study extensively issues like liquidity, tax treatment, costs of the agency which include the ability fee charged by managers, investor sentiment theory and the segmentation of the market which was first put forward by Lee et al (1991). Theoretically, there is a very strong relationship between managerial ability and the discount on condition that there is no change of the manager. For instance, poor performance results in the lowering of the perception of the investor on the managerial ability. This in turn results in an increase in the discount to entice the investor not to leave. If managers are frequently changed this perception is weakened considerably. Hence the empirical interconnection between the discount present in the fund and the managerial skills will significantly and majorly depend on if the managers who are underperformers are eliminated and the high-performing ones are maintained. They result into a conclusion that “many hypotheses have been suggested to explain the discount, but none seem to solve the closed-end fund puzzle” (p.35).

While the individual discounts of some of the closed-end equity funds are within the range of the industry average, others have had very severe fluctuations which cannot be related in any way whatsoever to the market conditions. An excellent case scenario is the German fund just after the collapse of the Berlin wall whereby there was a reverse in the trading of shares from a discount to a premium which was more than a hundred percent. This trend spread to other countries as their funds realized a decrease in the discount or an increment in the premium though this phenomenon was very much short-lived. (Hardouvelis, La Porta and Wizman(1994)). These kinds of episodes happen on frequent basis and deviations in the discount over some period of time, and also across funds tend to be not easy to elaborate. A lot of factors are available that may give the explanation of the association between the closed end funds and the discount. They are; restricted stock or illiquid assets, distribution policy, unrealized capital gain, a fund’s shares in comparison to that of a fund’s stock holdings liquidity, agency cost or management expenses, insider ownership, past fund financial records, turnover, price level of shares, proportion of foreign stock owned, fund size and investor sentiments about the stock market. Despite all these studies, very little is known about the determinants of the closed-end equity fund discounts present in the emerging markets. The paper hereby aims at demystifying the factors that determine the discounts in the closed-end funds traded in the UK stock markets over the last five years.

Massive literature tries to give explanation of the existence of discount in the closed-end equity fund market. There are four major theories put forward by the financial analysts which try to put in plain words the existence of this discount. These are; bias in estimates of NAV (overhanging tax liabilities or illiquid assets); agent costs (managerial dissipation and the present value of the fees of management); explanations based on segmented markets; and the loss of potential tax-timing options (www.econ.uoa.gr). But, not any of these presented theories have been able to fully explain this phenomenon. The up to date augment in the standard rate of discount in the United Kingdom has led the sector to be put under vivid inspection. The funds which are not able to maintain their discounts within the range that is acceptable are at a high risk of closure and recently to say the least every month in the UK there is a fund announcing wind-up strategies or restructuring preparations. Simultaneously, there is a number of fresh floatation of closed-end equity funds. Reputable funds that acquire and maintain a required need will survive from disappearance (Elroy D. and Carolina M. 2002). there will be further provision of opportunity by the European monetary union to bring closed-end (as well as open-end) funds to investors all over Europe according to some financial managers.

The above theories have deviated from the proficient market model, and have led to the introduction of models based on limited level-headedness. The closed-ended equity funds in the United Kingdom are majorly held by institutional settings rather than private equities. Recently, research that has been carried out on open-ended funds show that the performance of the fund can be reliably measured only in the sense that it is projected using a factor model of proceeds. There is now evidence with factor-based performance dealings of the performance of managers, many times putting into use the raw net asset value gain as the performance metric. Nevertheless, because of the frequent investment in the limited performance persistence amongst open-ended funds, the discount in the closed ended fund tends to increase. By contrast, researches on the closed- end equity funds for example Malkiel (1977) and Pontiff (1995) have up till now gained rudimentary dealings of closed end funds by specialized investment of the market, it is highly important for the evaluation of their performance in relation to an appropriate fund specific benchmark be carried out.

All these studies about the closed-end equity funds try to explain the connection between the managerial skills and the discount involved. This helps understand the performance of the equity funds. However these studies have failed to fully explain the presence of the discount in the equity fund markets not only in the UK but around the world as well. The aim of this paper is to further demystify and explain the correlation between the closed-ended equity funds and the discount factor puzzle in the past five years in the United Kingdom. The most important measures of performance involved in this form of study include the Sharpe measure, the Treynor measure and the Jenson model. The Sharpe gauge considers risk entitled to the entire fund and is hence significant for even minute investors as the common investor does not have skills together with knowledge to spread his/her investments.

This research will put into account the data emitted from the London stock market, financial journals and other financial literature materials on the performance of the closed-ended equity funds in the United Kingdom together with the discount factor over the past recent years. Although at time equity sells at a quality of their net asset value, discounts of approximately 10 and 20 percent have been the norm in the recent past. This research study scrutinizes the fluctuations of the discounts in the closed-ended equity funds in the United Kingdom over the past five years. The investor sentiment theory and the managerial skills are put under extensive scrutiny in this paper. The fundamental feature of the closed-end fund is fully put into focus by the investor sentiment theory in comparison to open-ended funds in the sense that they carry out risks on discounts in alignment with Capital Asset Pricing Model (CAPM), it has to be accredited in the sense that it is very much systematic. However, a major shortcoming of this hypothesis is that it does not fully explain the fluctuations of the different discounts on different closed-ended equity funds.

Discounts depict performance of the past but do not project the performance of the manager in future. According to Gruber (1996), closed-ended fund prices may include managerial performance prospect, there is no evidence to support this hypothesis. Secondly, in the pricing of these fund terms, the price of the share income and profits show no perseverance in the performance. However, there is minimal evidence of reversal of the price which is majorly attributed to the mean reversion present in the discount. Multi-factor regression is used to study and evaluate managerial skills.

The managerial skill can give an explanation to the fact that the discount has been rejuvenated and not made-up according to theory by Ross (2002). According to Gruber, Elton and Blake’s (1996a) study of open-ended funds, there is insignificant evidence in closed-end equity funds in the pushiness of performance of the manager. In earlier studies of British closed-end funds, Pontiff’s (1996) findings are rendered credible in the evidence that in the cases of higher residual risk in a fund, the more the price of its shares is likely to vary from the net asset value. Generally, the amount of price a minor investor is ready to pay for a fund, in relation to their net asset for every share, will basically show the apparent managerial skills; open-end equity funds are such a good example of the scenario in which the price and the net asset value are required to be equal.

This paper seeks to clarify if the under-performing managers are substituted? How discounts together with their dynamics are in relation to the issue of managerial replacements? And also whether there is the presence of any relationship between the discounts and performance after there is the control for managerial take-over? There is also the examination of investor sentiments put into measurements by the variation in the discount in the closed-end equity funds involves the common stocks gain generation procedure if the closed-end stocks are susceptible to the factor significantly as depicted by Lee et al (1991). A lot of data for analysis is obtained from the London stock exchange. Over the past five years the discount on the closed end equity funds has been on variation in the ranges of 10%. No economic hypothesis has managed to give an explanation about the closed end fund discount leading to the in depth scrutiny of the behavioral trends explanations. This makes the study shift towards the direction of the investor sentiments and its effects on the discount. It led earlier studies to deduce that it is logical that the investor sentiments have an impact on the rate of discount on the closed end equity fund. Manager replacement events may affect the volatility of the discount. In the UK in the 1960s, the closed-end funds were very much preferred and majorly held by private investors. Dimson and Mini-Pauello studied earlier theories to details and found that there was not a single one of them accounts fully and efficiently for the closed end fund independently given the notion that the market remains efficient. In the cases where the investors have limited information about the closed-end funds they are likely to be deterred from investment by others who give insufficient prospects about the diminishment of the discount on the fund.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 2: Literature review

Close end funds are entailed with a very strange phenomenon in finance which is not easily understood even after the numerous studies carried out on the fund. It is further complicated with the existence of discount in the fund and the behavior of the discount under different circumstances. Shares in the closed end equity fund are traded at premium to the net asset value of approximately 10%. The value of the premium coordinates to the start up fees and the underwriting cost. But, many times within several months the shares are listed in the stock market at a discount. On insolvency (open ending) of the fund, the shares’ price rise and the discount automatically disappear. The question still remains how the assortment of traded securities starts its life being valued at much extra than the worth of its components, spends a major part of its time being a smaller amount worthy than its own segment parts and finally ends up at a value equal to its constituents? This paper research seeks to relinquish the mystery that is associated with the closed end fund in the UK in the last five years with assistance from reference of earlier studies. One of such studies is Dimson and Minio-Kozerski (1999).

There are a lot of structural advantages present in the British closed end equity funds. They gain majorly from the considerable flexibility and the requirement to allocate at least a minimum of 85% of the dividends obtained from their worth. The gains from the investment cannot be disseminated and hence are reinvested in the fund, and the investment gains have been free from from corporate taxation since 1980. Most of the UK closed end equity funds often put into use this opportunity majorly to influence their portfolios. The British closed end equity funds are in some cases very similar to the US equity fund and have gone through similar periods of discounts and premiums.

 

2.0.1 US funds

Tax and regulatory status restrictions are some of the major challenges experienced in this market, the funds are obligated to dispense 90 percent of the acquired investment returns to attain qualification for segregation from corporation taxation. These closed end equity funds on the odd occasion take on any leverage. But, they have been very much favorable to the investors as they provide major exposure to the complicated and particular portfolios mostly with a center of attention on foreign or illiquid investments. Quite a lot of thoughts from different studies have been put forward trying to make sensual advances and understanding of the discount associated with the closed end equity funds. Though there have been many theories put forward, none of them fully explains the puzzle of the discount on the closed end equity funds. Two majorly important theorems of elucidation are slip-up of the net asset value and existence of agency expenses. Due to tax liabilities associated with unrealized capital gains, the net asset value may be misestimated or also due to the illiquidity of the funds’ holdings. Malkiel (1977) discovers that tax liabilities can be able to give a credible explanation for discount on the fund of not more than 6 percent. On addition, there is legitimacy that the prices of closed end funds rise on the instance of open-ending (Brauer (1984), Brickley and Schallheim (1985)) does not in any way give credibility of the hypothesis that net asset value is overestimated.

The discount may be termed as an outcome of the investors expecting managerial debauchery and capitalizing future management fees as it is from the agency perspective. From the study done by Malkiel (1977), there is no presence of any credible evidence of correlation between the managerial expenses and discounts. The theory put forward by Boudreaux (1973) purports that discounts show the prospects of prospect managerial performance. But, later studies do not find any distinct evidence of any important relationship between discounts and the future performance of net asset value. There is only a weak relationship as discovered by Roenfeldt and Tuttle in 1973.

Given that taxation on capital losses and gains is taxed upon acquirement and not accumulation, the best tax trading tactic is to discover capital losses instantly and postpone gains in anticipation of a forced liquidation (Constantinides 1983, 1984). An explanation of the discount may arise that an assortment of options to comprehend gains is more important than that of the resultant portfolio. There is legitimacy unfailing with the hypothesis that managed funds refute taxable investors the tax-trading opportunities linked with distinctive movements and variations of the entity security prices in the portfolio (Brickley 1991, Kim 1994). But there is the presence of a small number of investors who do business to minimize their tax arrears and others buy and hold stocks for the longer term (Odean 1998).

Many more explanations for the closed-end equity fund discount make their centre of attention to be the various forms of market segmentation. In the international market, closed end equity funds are affected by the exposure to the market whose equity gains are influenced by a diverse investor foundation than that of the local market. Locally, the price of the funds might be set so as to show responses to the managers by the private investors or their sales labors or the unusual valuations imposed on these companies by institutions in comparison to individuals. But, these theories and forms of study do not fully provide a credible explanation that appropriately solves the puzzle in the discount present on the closed ended equity funds. Careful studies give evidence that profits may be realized from uncomplicated procedures based on the level of the discount (Thompson 1978). The evidence of the inefficiency and unreliability of the US closed end fund market has led to the development of limited rationality model put forward by later schools of studies (Waldmann 1990). They purport that the presence of irrational sentiment of individual investors who are a majority in the US closed end fund markets, introduces an extra noise trader risk on the asset with which they trade. The threat present due this is priced and valued at equilibrium because the variations in investor sentiments are interlinked transversely of the investors and can never be varied away. According to Thaler (1991), discount are interrelated with the prices of other securities that are affected by similar investor sentiment for example the small stocks. In 1993, Miller punched holes into the credibility of the sentiment theory by doubting the connection between the premium and discount on the minute firms. Further research by Swaminathan (1996) shows that, miniature investor sentiments should not only affect present prices of the stocks, but should also be in a position to forecast future returns and gains of the stock. Reliable evidence is emitted by the empirical results cite that discounts conjecture miniature firm returns better than they do on the case of huge firm returns.

2.0.2UK studies

The main aim of this paper is to research the performance of the close- end equity funds in the United Kingdom in the period of the past five years and the discount that is interjected with the fund market. The existence of the discount despite the many studies continues to be a mystery in the financial market world. Compared to America, British closed end funds are more advantageous. British closed-end equity funds do possess a lot of structural niceties. They gain majorly from the considerable flexibility and the compulsion to dispense at least a minimum of 85% of the dividends obtained from their wealth. The gains acquired from the principal investment cannot be disseminated and hence are reticulated in the fund, and the investment returns have been excused from corporate taxation as from 1980. Most of the United Kingdom closed end equity funds often make use of this prospect majorly to influence their own portfolios. The British closed end equity funds are in some cases very similar to the US equity fund and have gone through similar periods of discounts and premiums. In Britain, the majority of the closed-end equity fund shares are institutionally hence there is a limitation on the rationality theory.

Studies by Levis and Thomas in 1995 give evidence that United Kingdom closed-end equity fund first offer to the public are subject to ‘hot’ durations of time of issue which majorly happen together with a discernible minimization of the discounts possessed by the veteran funds. There is much similarity of the aftermarket performance to that of the general equity initial public offers and the long term underperformance is small. A study by Draper (1989) showed that the prices of the United Kingdom closed-end fund shares significantly act in response to any reports of takeovers, open-ending and insolvency. By the time the month ends when all news about the open-ending has been included into the price of the shares, there is no further rise in the stock thereafter. The UK closed end fund market seems to react in haste to the broadcast of open-ending of the funds.

Draper puts forward a theory that significantly predicates that the post-announcement profits and gains from the funds that result in open-end are mainly realized if prices in the middle of the market are put to use. In the cases where prices are attuned to cater for the costs of transactions, strange gains never even reach near the levels present in US as stated by Brickley (1985). Further amendment of discount based strategies theory by Thompson (1978) results in the strategies that are based on discount earning excess gains and rendering consequences not statistically relevant. It is hence concluded that anomalous profits may be obtained by implementing a discount based plan, though these gains are lesser than the operational expenditure. With all this study, British analysts and scholars have not yet fully made advances on the liaison connecting discounts and the performance by managers.

2.0.3 Open-end funds

Contrary to the closed fund, an open end fund is the fund which is administered by an investment company that acquires funds from its shareholders and mostly invests in a selection of assets in agreement with a set of affirmed objectives and goals. Open end funds obtain funds by the sale of investments owned by the funds to the general community just like all other company which can put on the market stock of itself to the general population. Mutual funds acquire money obtained from selling their shares and make use it to buy an assortment of varied investment vehicles which are; bonds, stocks and money market investments.

In reimbursement for the funds they provide to the funds on occasion of buying shares, the shareholders acquire equity arrangement in the fund and as a result they also receive position in the underlying securities. In a large number of open-end funds shareholders are allowed to put up for sale and offload their shares at a time of their choice even though the share price in and open end fund will vary upwards and downwards daily in accordance with the feat of the underlying securities possessed by the funds. Compensation of open end funds includes vast allocation and skilled management of funds. Open end funds put forward choice, convenience and liquidity, although charge costs and many times require a minimum outlay.

 

2.0.4 Comparison with open-ended funds

In the case of open end funds, the value is very much almost the same as the net asset value. Therefore, investing a certain amount of money into the fund gives the meaning of purchasing shares that claim to the value of the same amount of money in the underlying assets (excluding the sales costs). Though purchasing a closed-end fund selling at a premium might give the meaning of buying assets that are worth less for a higher amount of money.

There are a few advantages of closed-end funds over their open-ended counterparts which are financial. Closed End Funds do not in any way deal with the cost of making and recovering shares, they mostly keep minute less cash in their dockets, and are not majorly interested in the market variations to sustain their “performance record”. Therefore in the case where a stock depreciates irrationally, the closed-end fund might break up for a bargain, while open-ended funds may get to sales too early.

In connection to that, in case of a market alarm, investors may sell in large numbers. Confronted by a large number of sell orders and having the need to raise funds for recoveries, the manager of an open-ended fund may be obliged to pit on sale stocks he would in normal cases keep, and retain stocks he would rather put up for sale, because of liquidity concerns. Therefore it may result in a very huge burden to the investments of lower-quality or companies with very low demand due to their underperformance. However, an investor abandoning a closed-end fund must put it on sale to another buyer; hence the manager does not need to sell any of the stock underneath the fund. The Closed-end equity fund’s price will very much probably depreciate at a faster rate than the market (harshly punishing those who engage in sales in the time period of the turmoil), though it is very much anticipated to recover when the intrinsically sound stocks appreciate.

For the reason that a closed-end fund is trading in the market, it must get in line with the set obligations, for example filing reports with the listing authority and holding stockholder meetings every year. Therefore stockholders are able to learn more about their fund and get involved in shareholder activism, such as protesting in cases of poor management.

2.0.5 Managerial performance

The first research that showed the relationship between anticipated managerial performance and the discounts was done by Boudreaux (1973). In his study he purports that persistent divergence of the price from the net asset value is unswerving with the market proficiency and highly depends on anticipated portfolio changes. The price may be projected to be equal to, or swerve by an unchanging fraction of, its net asset value only when the markets believes that the manager of the fund would never change the possessions of the collection. Premiums together with discount give credible information about the ability of the manager to perform in relation to a dormant investment strategy. By the use of stock-picking or market-timing ability, the eminence of mutual fund management has been investigated extensively.

Studies show that open-end funds, more precisely the volatile growth funds, show some choosing aptitude, but no typical timing capability. This was defined and accredited by Wermers (1997) using some several ground states based on the behavior of the stocks possessed in their measure assortment. These characteristics are book to market, market capitalization and prior year characteristics. Bello and Janjigian study the domestic equity open-end funds and account for the affirmative and significant market-timing and security selection abilities. Other studies show that standard undergraduate institution SAT score and age may forecast the gains. This hence supports the perpetration that a number of managers and administrators may simply be better than others and this somehow influences the rate of discounts on the closed end equity funds stock markets.

From the study by Gruber in 1996, it is evident that investors may be able to recognize better-quality managers and hence undeviating incremental capital to the open-end funds that are very well managed. In the cases where finer funds are closed ended, it is evident that discounts are probable to show shareholder prospects of upcoming management performance. In this view, Gruber gives a proposal that funds may trade at a lesser discount or in some cases a premium if the general market expects high-quality executive performance. Though the belief that discounts represent quality managerial skills of closed end funds, the present evidence gives a mystery because, discounts seem to be related to subsequent measures of performance pessimistically. The hard task of finding a connection linking closed end fund discounts and the management performance highly accounts for reasons why very minimal researches have paid attention to management performance. These leaves the notion that either the interrelation between the subsequent performance and discounts is not present or there is need to adopt more complex methods of analysis in order to identify the connection if any. For instance, in cases where funds pay extra than the ‘fair’ value of the managerial proficiency, its share are supposed to trade with a discount and the reverse is true according to the managerial performance theory. By rectification of weaknesses and shortcomings of the traditional definition of fund performance, there is the ability to study effectively and extensively the diligence and certainty of closed-end fund performance.

Berk and Stanton (2007) depict that investors strategically acquire new issues of closed-end funds of acknowledged unchanging life on provision that the likely managerial eminence matches the cost of the life of the fund. In the case of seasoned funds, there is the presence of long term managerial contracts meaning cost may not depreciate, but competition may force them upwards if the acquired gains are excellent. This form of study gives support to the rise of managerial fees over time whilst skill remains passive. Veteran funds buy and sell at a discount on regular given the fact that the equilibrium of the skills and the cost is put into great consideration. In the United Kingdom, there is direct contradiction to this theory because the experienced funds tend to require lowest managerial fees. In the year 2006, Gemmil and Thomas try to guesstimate a cross-section deterioration for the ratios of expense of 186 conservative closed end funds in the United Kingdom on the grounds of a variety of fund and board behaviors. The results are that mutually fund age and size have very major negative statistics coefficients. This also showed that in the case where the fund age is doubled, it is purported to add 10% of the expense ratio.

The major view of every research study is that market gives excess more credibility to the managerial skill contribution in division and allocation of returns and gains in the funds and in turn comes up short of the role of luck due to investors’ failure to act rationally on the presented news and their biasness to the information. According to Jain and Wu (2000), mutual funds which boast of precedent good performance obtain more finances even when they have no evidence in superiority in performance in the period after advertisement. Elton et al. (1989) discover that fresh issues of overtly traded product funds yield profits and incomes far under the very high rates projected in the brochure. Ferguson and Leistikow (2004) squabble that a comparable occurrence applies to preliminary public offerings of green closed-end funds: a boss with extraordinarily high-quality up to date performance is chosen whose perceptible handiness outweighs the amount of cost incurred from his skills and services. Due to the fact that projected superior performance projected is a matter of chance rather than expertise, investors consequently revise downwards their approximation of the manager’s skill, and for the said reason veteran funds tend to trade in the discounts.

It is very much complex to check these explanations of the closed-end fund discount effectively. If the Managerial Skill supposition is true, however, in a variety of funds those with enhanced past performance ought to be on lower discounts. In relation to this proposition, a fund managed by an executive with outstanding skill would not be probable to fall to the same discount as other funds, hence the elevated supposed skill of the dummies (UK Smaller Companies sector tend to have higher discounts on their funds).

Researches of open-end funds have discovered important non-linearity in the connection between precedent performance and net inflows, with vivid effects at the higher end (Chevalier and Ellison, 1997; Sirri and Tufano, 1998). These findings strongly put forward that apparent managerial skill affects the discount, except they are not adequate to show that Managerial Skills explain discounts hence the puzzle of the discount on the closed end equity funds and their performance still stands.

 

 

2.0.6The Discount

A major significant attribute that sets closed-end funds separately from additional collective investment schemes is the disparity between the funds’ prices of the shares and the value of their fundamental investments. The funds are sold in the stock market in a discount or premium to Net Asset Values. Investors, for that reason, have two ways of gaining (or losing) money—from any increase or drop in the value of the causal stash and from any contraction or widening of the discount.

The account of the closed-end fund discount and premium shows much preference and liking to this type of market. So far no legitimate theory or school of thought has been put forward to explain the reason why the closed end discount funds most of the times trade in discounts or what affects the rate of the discounts. In the 1960s, the typical discount varied around

10percent. Conversely, by the middle of the 1970s, private, as well as institutional, investors had deferred concentration in such funds and the common discount in the United Kingdom widened to almost 50 percent. The bull market of the 1980s and the prologue of fresh investment aims, and tax-efficient wrappers and fundamental structure improved interest in closed-end funds. By the early 1990s, the middling discount (expressed as the logarithm of the unweighted mean ratio of share price to Net Asset Value) had lessened to around 5 percent. The behavior of U.S. equity home funds very much follows the model of the U.K. market. In the 1970s, U.S. funds used to trade, on middling, at a discount bigger than 20 percent. Consecutively, the discount progressively lessened, and these funds currently trade at about a 5 percent run of the mill discount. Nonetheless, while U.S. closed-end funds are characteristically a retail product, a high level of institutional possession exists in the United Kingdom. Two-thirds of shares held in U.K. closed-end funds, on middling, are owned by institutions, and for a majority of the funds, the institutional percentage is to a great extent greater than two-thirds as shown in (CLL 2001). A great deal of the academic explore on closed-end funds has focused on explaining the discount.

Due to the reason that closed-end equity funds are exchange-traded, their price may vary from that of their net asset values. In precision, fund shares most of the times tend to trade at what seems to be irrational prices due to the fact that secondary market prices are over and over again to a great extent out of line with fundamental portfolio values. A closed-end equity fund may also possess a premium at some times, and a discount at other times. For example, Morgan Stanley Eastern Europe Fund (RNE) on the New York Stock Exchange was trading at a premium of 39% in May 2006 and at a discount of 6% in October 2006 as shown in the New York stocks exchange records. These large deviations and variations are not at all easy to explain.

US closed-end stock funds most of the times possess share prices that are 5% or more under the Net Asset Value (NAV). That means that, if a fund has 10 million shares outstanding and if its portfolio is worth $200 million, then each share represents a claim on that NAV of $20 and you might expect that the market price of the fund’s shares on the secondary market would be around $20 (UK Financial Journal). Nevertheless that is not generally the case. The shares may trade for around $19 or even only $17. In the earlier case, the fund may be said to be “trading at a 5% discount to NAV.” In the latter case, the fund might be said to be “trading at a 15% discount to NAV.”

The existence of discounts is also a mysterious factor because in cases where the fund is trading at a discount, preferentially a well-capitalized investor could come along and buy all the fund’s shares at the discounted price to gain much control on the portfolio and force the fund managers to dissolve it at its (larger) market value (however in the real sense, liquidity worries make this not possible since the gap between the bid and the offer price will increase at a very high rate since lesser and lesser shares are accessible in the market). Benjamin Graham purported that an investor can rarely go wrong by acquiring such a fund with a 15% discount. Consequentially, the contradicting view is that the fund may not liquidate in the desired period of time and you may be forced to sell at an even shoddier discount; however, like any investment, these discounts may simply represent the assessment of the marketplace that the portfolios in the fund may lose value.

What is more perplexing is that, funds in most cases trade at a significant premium to Net Asset Value. Some of these premiums are extreme, with some premiums of quite a lot of hundred percent having been seen many times repeatedly. The reason as to why any person may be willing to pay three times the price for each share in a fund whose investments value per share is only a third of the money spent is still mysterious, although irrational exuberance has been cited as the reason. One theory is that if the fund has a strong track record of performance,  the investors may hypothesize that the great excellent performance is due to high quality investment choices by the fund managers and that the fund managers will engage in the making on excellent profitable and prosperous choices in the projections. Therefore the premium represents the ability to immediately participate in the profits of the fund manager’s decisions.

Though there are numerous strong opinions, the conclusion and decision about this case scenario is yet to be made. It is easier to understand in cases where the Closed-end Equity Fund has the ability to pick and choose assets and arbitrageurs are not able to make up their mind on the specific assets till months later, though some funds are obliged to imitate a constant index and still trade at a discount.

2.0.7 Capital structure.

Closed-end funds are characterized by a fixed capitalization. The depicted form of structural layout makes it easier for the executive manager to commit in the fund in long term basis. In contradiction, open-end funds are characterized by the continual sale and emancipation of their units at or near Net Asset Value, and this at the appeal of any unit holder. For that reason, open-end funds have a capricious number of shares in issue.

Closed-end funds offer a large diversity of financial instruments, and their fund executives recurrently formulate new-fangled ways of giving outlay revelation. Dissimilar classes of venture are now on hand. In the United Kingdom, often they take account of run of the mill shares, highly leveraged shares (ordinary stockpile in a company with a wrap up date that is premeditated to give stockholders a highly leveraged profit in terms of both principal and income), income shares (securities that are at liberty to the superfluous income after expenses and subsequent to the income prerequisite of any preceding charge has been achieved), principal shares (securities that are allowed to the extra assets on wrap up after repayment of other share classes), zero dividend predilection shares (securities with a predestined pace of principal augmentation), stepped favorite shares (securities with a preset growth in both earnings and capital), warrants, and convertibles.

Even though not many of the U.S. closed-end funds usually take on any influence, United Kingdom closed-end funds additional recurrently make use of leverage by use of their own capital structures. The risk of highly leveraged shares is superior, on the other hand, for the reason that borrowing boosts Net Assets Value in growing markets but undermines them when markets plummet. For protection of the shareholders’ interests, there are precincts on the amount of capital that a company may have a loan of, but the preponderance of funds function with little levels of leverage, and preceding to 2001, the confines in leverage had on the odd occasion been reached. In disparity, open-end funds are by and large proscribed against acquisition of loans, which implies that unit holders’ benefit show a discrepancy directly with the value of their balanced component of the fund. The tendency by the discount to have leverage rises the fundamental holdings of the closed end equity fund.

In disparity, U.K. closed-end funds are not even a little bit permitted to dispense capital returns but must hold on to them for reinvestment. This capital gains tax on closed-end funds was abridged to 10 percent in 1977 and removed completely in 1980. For that reason, closed-end fund executives can turn over their portfolios without experiencing any capital gains tax legal responsibility. U.K. closed-end funds are not able to keep hold of more than 15 percent of dividends acquired. If the dividend they are able to hand out to their shareholders is inferior than the most wanted level, they are disallowed from putting on sale the fraction of their worth to boost the dividend disbursement.

 

2.0.8 Charges

The costs connected with acquisition of closed-end funds shares are in general inferior to those for open-end funds. Executives of the open-end funds set a preliminary charge of about 5 percent when units are put on sale. The bid-offer stretch, conversely, is time and again bigger than the first charge. In the United Kingdom, the computation is rigorously proscribed by the Department of Trade and Industry and, in theory, can set out as soaring as 12 percent. In disparity, closed-end funds have no preliminary organization indict when shares are bought, and the bid-offer spread is on the whole a propos 2 percent. The trade expenses drawn in buying or selling in the course of the investment trust executive company can be as low as 0.2 percent, while a full-service agent normally charges 1.65 percent.

Taking into consideration the executive costs and bid-offer spread as a whole, the cost coupled with buying and selling closed-end fund shares can be noticeably lower than 4 percent of the initial outlay and will never soar above 8 percent. With open-end funds, the corresponding costs can be as high as 13 percent.

2.0.9 Reputation

From the study by Malkiel (1995), good performance may give rise to a management obtaining a ‘premium rating’. Adams and Venmore-Rowland also purport that the market capitalization, and hence the discount, is affected the market’s insight of the capitalist capability of the company’s administration. It is not an easy task to deliberate this form of factor but Malkiel (1995) gives the notion that some measure of achieved profits may be in some case used as a proxy variable. Another way of remunerating and analyzing manager skills and reputation is the measurement and analysis of performance bonus. This results in a contradiction of the theory that good managers tend to be expensive.

2.1.0 Management Contract & Fees:

The investment manager is at liberty to be given a management fee from the Company in respect of each class of Shares equal to a certain percentage in each and every year of total net assets attributable to such class of Shares, which is paid at the end of every month. The management fee that is charged in respect to a certain or particular set of shares is allocated to that same class of the shares. A performance fee is also payable to the Manager if in the end of the financial year the Total Net Asset value is greater than the one projected and anticipated in the end of latest preceding financial year in respect of which a performance fee was paid, or the Listing Date. The performance fee accrues monthly and is paid to the Investment Manager in arrears as at the end of the relevant financial year (AIDA Investment Company).

2.1.1 Premiums/discounts, closed-end fund returns, and NAV returns

According to Lee et al. (1991), when closed-end funds buy and sell at a discount (premium) they must suggest a higher (lower) gain to recompense investors.  It should be renowned here that there is largely the estimation of closed-end fund premiums rather than discounts, as is the case in Lee et al. (1991) and Elton et al. (1998), to ensure that there is the ability to obtain a positive sentiment index. It is a fact that the making of the sentiment index in this paper is identical to the earlier studies. This means that, when the index increases or decreases, it indicates investor optimism or pessimism respectively.

 

 

2.1.2 Portfolio Composition

 There are no limitations on holding illiquid stocks. Nevertheless, funds are obligatory to hold at least 25 percent of their net asset value in stocks in order to be let them off from capital gains tax. It is projected that the funds that grasp more stocks will sell at a larger discount due to the fact that common stocks are by far the riskiest and the hardest to hedge among the assets invested in by closed-end funds. Therefore, discounts are anticipated to increase as a fund appreciates its investment in common stocks. Despite the fact that Grullon and Wang (2001) fail to give credible statistically significant relationship between this variable and the discounts on the U.S. equity funds, the stock holdings of UK funds might be an significant factor in explaining the discount due to the stock market inefficiencies.

In relation to the investor sentiment hypothesis, small stocks are majorly held by small investors and for this reason; they are disrupted more by investor sentiment. If closed-end funds also invest in small stocks, they will most probably come into collision with investor sentiment risk. To account for this effect, the share of stock holdings invested in the smallest three size deciles portfolios will be put into consideration in the empirical model. It is anticipated that as the small stock holdings of funds increase, their discount will increase as well.

2.1.3 Diversification

Diversification is another worth studying elucidation for the discounts in the closed end equity funds’ portfolio (Boudreaux, 1977). This explanation is exempted for the U.S. closed end funds due to the reason that individual investors can easily attain the diversification benefits by themselves. On the other hand, diversification might be a credible elucidation for discounts on UK closed-end equity funds because stock investment is relatively new, diversification is expensive, and principles of modern portfolio management are not utilized by UK institutional investors (Yüce, Önder and Mugan, 1999). For this reason, investors could be willing to pay a higher price for a well-diversified portfolio put up by a closed-end fund. This results in the notion that, the more diversified a fund’s portfolio, the smaller the expected discount.

2.1.4 Liquidity:

Liquidity of assets invested in by funds might affect the value of funds’ shares. If a segment of the investments included in the portfolio of closed-end funds are not liquid, prices of these assets used in calculating their net asset value may not give a reliable representation of their true market values.

In addition to the liquidity of assets held in a portfolio of a fund, liquidity of the fund’s own shares might be an significant factor. Datar (2001) purports that discounts are realized when claims issued by funds are not as much of liquid as the assets included in their portfolios. With the help of many trading activity measures as proxies for liquidity, he puts forward empirical evidence strongly makings his claims credible enough. What is more, Boudreaux (1973) finds a significant relationship between trading volume of fund shares and the discounts on these funds. Hence, it is hypothesized that funds with more liquidity (measured by the turnover ratio) will have lesser discounts, controlling for the size of the funds.

According to Grullon and Wang (2001), funds with large block holdings are anticipated to have higher discounts. On the other hand, they fail to report significant relationship. They purport that as the fund is dispersedly owned by many shareholders, the discount is expected to be lower; but as the holdings of the largest shareholders increase, the discount is expected to rise significantly. If ownership is not dispersed, or if there are few large shareholders, they might use the funds for their own purposes and their actions may not be controlled by the minority shareholders that have limited rights in emerging markets like the London stock exchange Malkiel (1977). For example, on average 7.7 percent of the U.S. closed end equity fund shares are held by block holders (Grullon and Wang, 2001).

2.1.5 Size

Even though the size of the fund is one of the prospective explanatory variables raised by the financial industry, Malkiel (1995) does not find a credible connection interlinking the size of the discount and the size of the fund. Nevertheless, this might be a valid explanation for discounts in an emerging market where investors may not be well-informed about the operations of a company (Malkiel 1995). Additionally, large funds might be able to have minimal managerial, administrative and transaction costs because of economies of scale in their operations. Therefore, the discount is expected to be lower for larger closed end funds.

2.1.6 Past Performance

Based on the performance of the fund earlier, investors may be willing to pay a premium if they think that the good performance will carry on into the future. When past performance is used as a proxy for future performance, it is anticipated that the higher the return on a fund based on its net asset value, the lesser will be the size of the discount.

2.1.7 Market Condition:

The wide-ranging performance of the market might affect the size of the discounts also. If the investor sentiment theory holds, as the market goes up, people will be optimistic about the market resulting in a decline in discount. On the other hand, if it is a bear market, the pessimism will increase in the market, resulting in an augment in the bulk of the discount.

 

 

 

 

 

 

 

Chapter 3: Methodology

The closing prices of stocks and market indexes are to be taken mainly from the web page of London Stock Exchange. Financial newspaper, a list of academic article, annual and quarterly reports, fund managers report, AMC?s review and the stock market data will be some of the sources from where evidence and data will be achieved for this dissertation.
In this dissertation the performance of the mutual funds are being examined by employing both the definitions of risks, the standard deviation of risk and beta.
In array to settle on the risk-adjusted returns of asset portfolios, several reputed authors have worked from the 1960s to build up amalgamated performance indices to assess a folder by comparing substitute portfolios within a meticulous risk class. The most significant and extensively used procedures of performance are:
The Sharpe Measure
The Treynor Measure
Jenson Model

3.0.1 Performance Measures of Mutual Funds

Mutual Fund industry today, with a lot of players and a larger number of schemes, is one of the most favored investment avenues in the United Kingdom. On the other hand, with a surfeit of schemes to select from, the retail investor is faced with tribulations in choosing funds. Factors like the outlay strategy and executive style are qualitative, though the funds record is a vital indicator also. Despite the fact that precedent performance independently cannot be analytical of projected performance, it is, candidly, the only quantitative way to evaluate how excellent a fund is currently. For that reason, there is a requirement to appropriately evaluate the precedent performance of diverse joint funds.

Worldwide, excellent mutual fund companies above are rated by their AMCs and this reputation is unswervingly connected to their advanced strategies of selection of stock. For mutual funds to thrive, AMCs must be held responsible for their strategies in stock selection. In other words, there have got to be some performance indicator that will make known the excellence of stock assortment of an assortment of AMCs.

Profits and gains unaccompanied should not be well thought-out as the foundation of measurement of the performance of a mutual fund schemes, it ought to also take account of the risk taken by the fund director for the reason that diverse funds will have diverse levels of peril connected to them. Risk linked with a fund, in a broad-spectrum, can be definite as unpredictability or fluctuations in the proceeds produced generated by it. The higher the fluctuations in the profits of a fund for the duration of a given time period, advanced will be the hazard connected with it. These fluctuations in the incomes generated by a fund are consequential of two guiding parameters. To start with, common market fluctuations, which have an effect on each and every one of the securities, present in the market, known as market risk or systematic risk and second, fluctuations as a result of precise securities available in the portfolio of the fund, called random risk. The Total Risk of a given fund is sum of these two and is calculated in terms of standard deviation of incomes of the fund. Systematic risk, on the other hand, is deliberated in terms of Beta, which represents fluctuations in the Net Asset Value of the fund vis-�-vis market. The further receptive the Net Asset Value of a mutual fund is to the fluctuations in the marketplace; elevated will be its beta. Beta is deliberated by relating the incomes on a mutual fund with the profits in the marketplace. Despite the fact that random risk can be varied all the way through investments in a figure of instruments, methodical peril cannot. By making use of the risk return affiliation, there is the trial to evaluate the aggressive force of the mutual funds vis-�-vis one another in an improved way.

So that there is precise determination of the risk-adjusted returns of investment portfolios, a number of renowned authors have worked from the 1960s to build up amalgamated performance indices to appraise a folder by comparing different portfolios within a meticulous risk class. The mainly significant and extensively used measures of performance are:

The Treynor Measure

The Sharpe Measure

Jenson Model

Fama Model

3.0.2 The Treynor Measure

Developed by Jack Treynor, this one studies and deliberates funds on the basis of Treynor’s Index. This Index is a proportion of profit produced by the fund over and above risk free rate of return (in most cases taken to be the return on securities backed by the government, as there is no credit danger associated), in the course of a known era and systematic risk associated with it (beta). Symbolically, it can be represented as:

Treynor’s Index (Ti) = (Ri – Rf)/Bi.

Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund.

All risk-averse investors would like to get the most out of this value. Despite the fact that a high and positive Treynor’s Index shows a better risk-adjusted performance of a fund, a stumpy and negative Treynor’s Index is an indication of inauspicious performance.

3.0.3 The Sharpe Measure

In this model, performance of a fund is deliberated on the basis of Sharpe Ratio, which is the one of profits realized by the fund over and above risk free rate of return and the total risk connected to it. According to Sharpe, it is the whole peril of the fund that the investors are apprehensive about. As a result, the model evaluates funds on the basis of incentive per unit of total risk. Symbolically, it is written as:

Sharpe Index (Si) = (Ri – Rf)/Si

Where, Si is standard deviation of the fund.

Whilst a towering and positive Sharpe Ratio shows a better risk-adjusted performance of a fund, a low and negative Sharpe Ratio is a sign of adverse performance.

3.0.4 Comparison of Sharpe and Treynor

Sharpe and Treynor measures are comparable in some way, since they both split the peril premium by a numerical peril measure. The entirety peril is suitable when calculating the risk return relationship for well-spread portfolios. But, the systematic risk is the pertinent measure of risk on calculating fewer than fully diversified portfolios or entity stocks. For a well-spread portfolio the entirety risk is equivalent to logical risk. Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) ought to be impossible to tell apart for a well-spread portfolio, as the whole risk is abridged to logical risk. For that reason, an inadequately spread fund that positions higher on Treynor measure, compared with another fund that is highly spread, will grade lower on Sharpe Measure.

3.0.5 Jenson Model

Jenson’s model projects an additional risk attuned performance measure. This measure was put forward by Michael Jenson and is every so often referred to as the Differential Return Method. It involves assessment of the proceeds that the fund has emitted versus the returns in reality anticipated out of the fund given the level of its systematic risk. The superfluous between the two returns is called Alpha, which events the performance of a fund compared with the authentic profits over the period. Required income of a fund at a known height of risk (Bi) can be calculated as:

Ri = Rf + Bi (Rm – Rf)

Where, Rm is average market return during the given period. On calculating it, alpha can be acquired by subtracting requisite gain from the real gain of the fund.

Advanced alpha means better performance of the fund and vice versa. Restraint of this model is that it puts into account only systematic risk not the whole risk linked with the fund and a run of the mill investor cannot alleviate unsystematic risk, as his acquaintance of marketplace is primordial.

3.0.6 Fama Model

The Eugene Fama model is a conservatory of Jenson model. This model puts into comparison the performance, calculated in terms of profits, of a fund with the requisite gain proportionate with the entirety risk related with it. The disparity amid these two is taken as a measure of the performance of the fund and is called ‘net selectivity’.

The net selectivity is a clear indication of the skill of selecting stock by the fund manager, as it is the surplus gain over and above the return essential to reimburse for the entirety risk in use by the fund manager. Advanced value of which shows that fund manager has gained profits well on top of the return proportionate with the height of risk taken by the manager.

Required return can be calculated as: Ri = Rf + Si/Sm*(Rm – Rf)

Where, Sm is standard deviation of market returns. The ‘net selectivity’ is then acquired by subtracting this requisite gain from the authentic return of the fund.

Amongst the above performance measures, two models to be precise, Treynor measure and Jenson model use systematic risk based on the principle that the unsystematic risk is diversifiable. These models are appropriate for big investors like institutional investors with elevated risk taking capacities as they do not countenance scarcity of funds and can endow in a figure of options to weaken a number of risks. For them, a portfolio can be extended crossways a number of stocks and sectors. On the other hand, Sharpe measure and Fama model that put into account the whole risk linked with fund are fitting for diminutive investors, as the run of the mill investor does not have the indispensable skill and resources to broaden the horizons. What is more, the assortment of the fund on the foundation of greater stock assortment aptitude of the fund director will also help in protection of the capital invested to a huge degree. The venture in funds that have resulted in huge amounts of profits at elevated levels of risks leaves the money all the more lying on its front to risks of all kinds that may go beyond the personal investors’ risk enthusiasm.

In the case of the exploration of closed end equity funds in the United Kingdom in the past five years and the discounts associated with them, the earlier three measures are put into great use. The London stock exchange is immensely used with variations, deviations and fluctuations of the discount being the main areas of the study.

3.0.7 Determinants of Discounts on Closed-end Funds

By use of the help of the Generalized Method of Moment (GMM) there is estimation of the models of any kind that put into account the discounts on closed-end funds. The replica in this paper explains the variation in monthly and quarterly discounts. Agency cost, diversification, liquidity of the fund, market conditions, and past performance seem to be genuine and credible reasons for the existence of discounts on United Kingdom closed-end funds.

From the research it is discovered that if the proxy for agency cost, general administrative expenses, increases, discount on UK closed end equity funds also increases significantly in all models. This finding gives support to the agency cost explanation of discounts. What is more, as the turnover rate of fund appreciates the size of the discount declines. For this reason, the frequently traded funds seem to be correctly valued in the market. On the other hand, there is no proof of credible crash of the number of industries invested in, although the coefficient is discovered to be a negation. In the crisis period, the discount size is found to be higher controlling for the other characteristics of the funds when the discounts are calculated on a monthly basis.

All of the stocks traded in the London Stocks Exchange are divided into ten deciles portfolios in the groups of their market capitalization annually.  Then, the proportion of fund’s assets invested in the smallest 3 and 5 size deciles portfolios is calculated.

Conversely, coefficient of the crisis dummy variable is not statistically significant. As the profit on the market portfolio appreciates, it is discovered that the size of the discount orates to a very large extent. This can be very much effectively accounted for by investor sentiment.

An additional factor affecting the discounts is the performance of the fund. Investors might be using past performance, that is, lagged return on Net Asset Value, as a pointer of prospect performance.

As net asset value profit in the preceding interlude increases, the size of the discount declines indicating that the prices of these funds increase significantly. As anticipated, the coefficient on BANK variable is established to be negative in both quarterly and monthly estimations. Nonetheless, none of the bank coefficients are noteworthy. Therefore, the variation in the size of discount between bank and non-bank affiliated funds can be accredited to the other characteristics of funds, for example their size, portfolio characteristics, turnover rate.

In the U.K.-listed closed-end funds Gemmill and Thomas (2006) discover that discounts are adversely affected from the corporate governance measures. Distinct from the projections, share of stock holdings in fund portfolios do not have noteworthy influence on the size of discount.

Using monthly observations, it is practical that, as the funds increase their holding of the smallest stocks, their discount increases significantly as projected by the investor sentiment hypothesis controlling for net asset value and other fund characteristics. This discovery can be accounted for by the risk and illiquidity of these stocks. An additional diversification measure, the number of securities held in the portfolio, is also seen to be a major factor explaining the discount on closed-end equity funds. The results show that, as funds augment the number of securities in their portfolios, the discount turns downwards significantly, supporting the diversification hypothesis.

Discounts on all funds are unconstructively interrelated with the profit on the market supporting investment sentiment hypothesis. If diminutive investors are sanguine about the market, they might be investing in closed-end funds and as a result, the size of the discount declines.

 

 

 

 

Chapter 4: Findings and analysis

4.0.1 Data sources

This research is based on the data and statistics from different sources like the London stock exchange spanning the duration between January 2006 and May 2011. The sample consists of a majority of the closed-end funds listed in the London Stock Exchange since January 2006. Regardless of the fact that most closed-end funds went public before, the sample depicted in this paper is restricted to the post-January 2006 period. Monthly closed-end fund net asset values are obtained from the Association of Britain Institutional Investors. All fund and stock profits taken into consideration in this research paper are simple average monthly returns, including of dividends. The portfolio inclusions of every fund were obtained from the quarterly financial statements of the funds.

4.0.2 Portfolio samples

In this study, much research is directed to the proposition that the investor sentiment (which is, the index of changes in the value weighted index of premium/discount) enters the income generating procedure for a set of unreceptive portfolios and an extra size-based portfolios, active portfolios, industrial stocks and one utility stock. Once more divergent to the investor sentiment theory, when the bear market begun after 1999, new non-listed funds were established.The LARGE, MEDIUM and SMALL (size-based) stand for equally-weighted portfolios. These portfolios were founded on the basis of ranking industrial and utility stocks at the end of every year in downward order based on their market capitalization. Subsequently, evenly weighted monthly profits are anticipated for each of these portfolios for the model era.

 4.0.3 Index construction and description of variables

With the use of Lee et al. (1991) study, a sample of the investor sentiment index can be constructed making use of a value weighted index of premiums as follows:

VWPRt ¼Xni¼1wiPremitXni¼1VWPRt ¼Xni¼1wiPremit ð1Þ

where,wi ¼NAVitPni¼1NAVit;

NAVit¼Net Asset Value of fund i at end of month t.

Premit ¼SPit _ NAVitNAVit _ 100 ð2Þ

SPit¼Stock Price of fund i at the end of month t

n¼the number of funds with available Premit

In adding up, we computed the variations in the value-weighted index of monthly premiums:

VWPRt = VWPRt –VWPRt-1.

4.0.4 Discounts and Their Determinants in the UK markets

Monthly and quaternary closed-end equity fund prices in conjunction to their net asset values are studied and analyzed for the period of five years between 2006 and early 2011. The percentage discount for a fund i in a given month t,

DISCit, is calculated as,

100 ⎥⎦⎢⎣⎡ −=itit itit NAVNAV SPDISC ,

where NAVit is the market value of a fund i’s porfolio10 at the end of the week t and Spit represents the stock price of fund i at the end of week t. A positive DISCit value means a discount and a negative number indicates a premium.

With the use of the factors discussed in the literature explaining the discount and its regulation in the United Kingdom, undiscovered capital gains cannot be used as an explanation for the presence of discounts in UK since closed-end funds are exempt from tax payments. Additionally, there is not much disparity among the funds in terms of their dividend payout policy. Finally, the investor sentiment hypothesis only to some extent explains the discounts on closed-end funds (Güner and Önder, 2007). For that reason, the remaining explanations of discounts can be put into the categories here below; portfolio composition, diversification, liquidity, agency cost, ownership structure, size of the fund, past performance, and market condition. These different categories and groups have been discussed in the course of this research paper and their effect on the discounts present in the closed-end equity funds well explained though they do not independently affect the discount majorly.

This paper entails monthly closed-end fund data and financial statements prepared quarterly. For that reason, there is no fund operating expenses on a monthly basis. As a result, what is called as net asset value this paper is in point of fact market value of closed end fund’s portfolios on a per share basis. In view of the fact that this research deals with monthly data, segregation of fund operating expenses in calculating the net asset value of a fund is not probable to have a huge impact on the results obtained. In addition, discounts reported in this paper are anticipated to be higher than the actual discounts on funds.

4.0.5 Empirical Model

The following regression model is estimated in analyzing the factors explaining the discounts on United Kingdom closed-end funds:

DISCit = f(Portfolio Composition, Diversification, Liquidity, Agency cost, Ownership

Structure, Size, Past Performance, Market Condition)

Portfolio Composition is measured by the use of two variables: SHOLD measures the percentage of the portfolio invested in stocks and S3DECILE is the share of NAV invested in stocks from the smallest three deciles portfolios. As the stock holding of the portfolio invested in stocks from the smallest three size deciles portfolios increases, the discount of the fund is expected to increase (Malkiel 1995). Due to the fact that funds report their stocks holdings on a monthly basis, S3DECILE is available on a monthly basis.

Diversification is measured by two variables given the available data: the number of different sectors a fund’s portfolio is invested in (NINDUSTRY) and the number of different stocks held in a portfolio of a fund (NSTOCKS). For the reason that funds are permitted to invest in a variety of industries, they can diversify their portfolio by investing in stocks from different industries and by investing in different stocks. As a fund’s diversification increases because of either variable, the discount is anticipated to decline.

Liquidity of the shares of the fund is measured by the turnover rate (TURNOVER). It is termed as the ratio of trading volume of a fund’s shares to its number of shares outstanding.

However, there is no information about the payments made to portfolio managers. As a result, the natural logarithm of the fund’s administrative expenses, LOGADMEXP, is used as a proxy for agency cost. Administrative expenses are in nominal terms and they are increasing throughout our sample period partly because of high inflation rate experienced in the country. To account for changes in administrative expenses due to inflation, these expenses are deflated by inflation.

Ownership structure is studied comprehensively and effectively with the use of by two variables. BANK is an pointer variable taking a value of 1 if a fund is affiliated with a commercial bank and 0 otherwise. PUBLIC, measures the ownership concentration of the fund. This is the characteristic segment of the equity of the fund held by public.

The logarithm of the total Net Asset Value of the fund (LOGNAV) is used to control for the size of the fund.

The past performance is measured by the lagged return on the NAV of the fund (LRNAV).

The market is proxy by the return on the LSE-100 index (RMARKET). To ensure that autocorrelation in error terms is removed, the lagged discount, DISCOUNTt-1, is also included in the replica.

Because the names of stocks built-in in the portfolio are reported on a monthly basis, the following model is estimated using monthly data:

DISCOUNTt = f(SHOLDt, LOGADMEXPt, BANKt, PUBLICt, LOGNAVt, TURNOVERt,

NINDUSTRYt, CRISISt, RMARKETt, RLNAVt, DISCOUNTt-1) (1)

The monthly model includes variables about a fund’s stock holdings in addition to the quarterly variables:

DISCOUNTt = f(SHOLDt, LOGADMEXPt, BANKt, PUBLICt, LOGNAVt, RLNAVt,

TURNOVERt, S3DECILEt, NSTOCKt, CRISISt, RMARKETt, DISCOUNTt-1) (2)

Because banks played an crucial role in the expansion of the stock market and the fund industry, the models specified in equations (1) and (2) are also estimated separately for bank affiliated and non-bank affiliated funds. These models help us to examine whether the impacts of these factors on the size of discounts change with bank ownership. In estimating all of these models, the General Method of Moments (GMM) model is used because of heteroscedasticity and non-normal distribution of discounts.

4.0.6 Empirical Tests

To start with, we check if the allotment of the discount shows proof of being squeezed asymmetrically, steadfast with the existence of higher and inferior limits. If censoring is present, there is expectancy to find:

(i)                 the distribution being skewed to the right, because of the asymmetry; and

(ii)                the tails of the distribution are cut off, giving rise to reduced kurtosis relative to the distributions for prices and net-asset values.

To avoid any fresh-issue bias, the model is restricted to the 20 oldest funds from the sample of the numerous funds. Combining skewness and kurtosis, discount spreads show important non-normality (according to the Jarque-Bera test at the five percent significance level)

There is thus some substantiation that the upper and lower arbitrage limits reshape the discount distribution. Simultaneously, censoring has the expedient effect of making the circulation of the discount more typical than it would or else be.

We estimate a cross-section regression of the form:

i i i

i i i i i

fDIV g SIZE error

DISCOUNT a bEXPENSE cBETADISC d AGE eRESERR

+ + +

= + + + + log ( )

log( ) where the discount (DISCOUNT), expense ratio (EXPENSE), and dividend yield

(DIV) are measured as averages over the five years, BETADISC is the individual fund sensitivity to the value-weighted average discount and represents a systematic noise factor, age (AGE) is measured in years, RESERR is the residual error from a replicating regression of fund net-asset-value returns on market indices, and SIZE is the average market value of a fund over the sample period. The subscript i denotes company. From the theory, we expect to find positive values for coefficients b (expenses), c (noise factor), d (log age), and e (replication risk); negative values are expected for f (dividend yield) and g (log size).

The data are averaged over the five years available, rather than considered year-by-year, because the aim is to explain differences in long-run average discounts across funds rather than short-run variation.

The results point to the fact that all of the variables are imporatnt at the one percent level, apart from size which is significant at the five percent level. On the other hand, one of these variables has an unanticipated sign: Funds which bear more systematic noise risk (BETADISC) have considerably lesser (rather than superior) discounts. Due to the reason that the noise-factor variable is measured with error, the analysis is repeated using Fama-McBeth regressions on data grouped into classes by size of noise factor.

The result is unchanged. This leads h view of LST that noise trading is a priced factor which causes the discount.

The considerably negative sign on the noise factor is a mystery, for it seems unlikely that investors actively look for exposure to funds with more non-diversifiable discount-risk.

The optimistic connection of discount to duplication peril is unswerving with the theory that the discount is bigger if the upper arbitrage vault is higher and it confirms preceding U.S. and U.K. empirical results (Pontiff (1996) and Dimson and Minio-Kozerski (1998)). The significance of size has been eminent in many other studies. The result on dividend yield is steady with Pontiff.

The bombshell is that bigger operating expenses are not considerably related with a larger discount, but this seems to be due to the presence of co linearity among the illustrative variables. Operating costs are big for funds which are green, difficult to imitate and minute. The uncomplicated correspondence of expense ratios with each of these variables exceeds 0.5 in complete value. By difference the easy connection of the discount with other variables exceeds 0.12 in absolute value with only one other variable, age of fund. A compound regression confirms the noteworthy connection of each of these variables to expenses. Thus it is clear that three variables which are most strongly connected to the size of the discount _ log of age, duplication risk, and log of size _ are also strongly related to the cost ratio.

The explanation why managing expenses are not unswervingly linked to the discount in the cross-section is owed to fresh funds. These are put up and running in ‘hot periods’ when there are negative discounts and this provides executives with the chance to charge high expenses. The positive sentiment towards new funds at the time hides the potentially negative impact of their elevated expenses. If a thrifty deterioration is run of the discount as a function of expense ratio and age of fund only, the expense ratio is considerably related to the discount at the 1 percent level.

This leads to the wrapping up that there is no credible evidence of hold up for the proposition that noise-trading is a valued factor which is rewarded by the discount. But it is discovered that the discount on a closed end equity fund is dependant principally on how expensive it is to arbitrage. Funds that are minute, hard to duplicate, and have low dividend yields have big discounts. Complexity of duplication increases the discount due to the fact that it elevates the upper arbitrage vault, while leaving the lower limit unchanged. Very huge expenses and costs in terms of management also result in a larger discount, even though this relationship is hidden by the co linearity of expenses with age of fund and cost of arbitrage.

Returns as at May 31, 2011

 

Fund

Group Avg

  Index*
1 Month -2.41% -2.20% -2.00%
3 Months -2.20% -0.67% -0.10%
6 Months 1.05% 1.13% 2.40%
1 Year 19.81% 17.70% 19.28%
2 Year Avg 12.10% 10.88% 9.79%
3 Year Avg -0.75% -1.12% -0.78%
4 Year Avg -1.51% -4.79% -4.26%
5 Year Avg 1.53% -0.75% -0.10%
10 Year Avg 3.36% -0.07% -0.12%
15 Year Avg 2.77% 3.42%
20 Year Avg 5.22% 6.57%
Since Inception 4.20%
2010 11.27% 7.21% 6.76%
2009 22.04% 18.79% 11.78%
2008 -30.64% -30.97% -26.05%
3 year risk 15.67 17.58 15.47
3 year beta 0.91 1.00 1.00

*MSCI World ($ Cdn)

4.0.7 Investor Sentiment and the Discount in Time Series

4.0.7.1Investor Sentiment and the Sector Discount

With already the consideration of the reason why a long-term discount is present, the center of attention now shifts to give a valuable explanation as to why the discount deviates over time. We conjecture that the discounts on closed-end funds are shifted from symmetry by flows of funds, which replicate the “sentiment” of diminutive investors rather than rudiments. This proposition is contentious. For example, Warther (1995, pp. 232 to 233, italics added) notes: “The popular press regularly quotes analysts who declare that mutual fund flows are the new indicator of investor sentiment. It is therefore curious that fund flows have no discernible relation to closed-end fund discounts, which are another often-cited measure of investor sentiment”.

Here the study carried out in this paper puts into consideration the monthly time series between January 2006 and May 2011 for the closed-end funds in our model. Data are available (from the trade organization representing managers) on retail-investor flows into/out-of open-end funds by investment sector. These closed-end funds are subjected into groups of every sector and their weighted mean discount for each and every sector is seen as a variable to be explained.

There is strong and huge evidence suggesting a presence of a very well-built negative impact of retail flows on the discount. We put forward that the discount and retail flows are calculated simultaneously. Despite the fact that retail flows may affect the discount, it may also be the case that a little (or negative) discount attracts flows. We consequently carry on by testing if there is a co integrating connection amidst the level of discount and retail-investor flows, of the general form:

jt jt jt DISCOUNT = a + bFLOW +V

where DISCOUNT is the sector discount, FLOW is the monthly retail inflow/outflow to open-end funds in the same sector (standardized by the total market value at the beginning of each month of open-end funds investing in that sector), V is a disturbance term, subscript j denotes sector, and subscript t denotes month. The equation is a symmetry (long-run) linkage which is anticipated with short-run (monthly) data. Incomplete autocorrelations and Augmented Dickey-Fuller tests corroborate that flows and discounts cannot be eminent from the processes for each of the segments. A test for co integration is carried out using the Jenson model, which is a development of the Johansen (1995) procedure. The likelihood ratio test rejects the hypothesis of no co integration at the one percent level for all sectors. The coefficients of the co integrating equation are anticipated for each of the sectors and also a two equation Vector Error Correction (VEC) model, putting into use maximum likelihood methods. The Treynor measure is also tested prove the existence of the discounts on the closed end equity funds.

The variation in interest rates is at a standstill and introduced as an exogenous variable.

Jointly with the substantiation on the existence of co integration, this is the most significant result of the time-series analysis. In distinction to the statement by Warther (1995), there is the discovery that retail-investment flows in the U.K. have a clearly discernible relationship to closed end- fund discounts.

There are two results of the hypothesis that are very noteworthy. To start with, the coefficient on alter in interest rate is not important in any equation, which is steady with all previous U.S. and U.K. studies. Second, for all segments the correction of errors comes via the coefficient g in the equations and not via d. This means that, it appears that the modification to symmetry comes at the start from an alteration to flows rather than an adjustment to the discount. To enhance the measurement of the velocity of the modification, a distress was administered to flows and its force on the level of discount imputed. This is unswerving with retail investors becoming very much interested in specific sector and huge inflows taking place, driving up the premium on existing closed-end funds meaning that the discount becomes extinct in some cases and in other cases it is driven downwards. The countervailing retort in the form of fresh issues takes only a month or two.

In summing up, the co integration analysis indicates a highly significant connection between retail-investor flows and closed-end-fund discounts. This is a major and credible evidence which favors the hypothesis and purports that retail-investor sentiment is accountable for activities of the discount.

4.0.8 Long-run Impact of Small-investor Holdings on the Discount

It is not easy to explain why the typical discount moves so much over periods of a number of years, for example, from 22 percent in January 1986 to four percent in January 1994.

A superficial assessment shows that there is an escalating tendency in the discount to the mid-1970s, followed by a long withdrawing inclination to the mid-1990s.

For the reason that these trends are tremendously long, the investigation of this research paper can only be evocative rather than decisive.

Consistent with other studies here-mentioned, there is the hypothesis that the discount depends on the flow of investment from miniature shareholders. To test the credibility of this proposition, there is the use of annual data on the fraction of all the shares held by retail investors in Foreign and Colonial Investment Trust from 1970 to 1999. Foreign and Colonial is the biggest U.K. closed-end fund over this period and delegate of the whole universe: Its monthly discount represents the average discount for all funds with a correlation of +0.94.

Throughout this period it is evident that the average of the closed end equity funds were trading at a premium which is a negative discount. The correlation is +0.83. This is the information obtained from other studies and analysis carried out before on the London Stocks Exchange market. If a linear connection amidst the two variables is assumed, when retail investors hold half of the shares, the discount is five percent; when retail investors trim down their holdings to one quarter of the shares, the discount rises to 25 percent.

This study is unswerving with the presence of variations in small-investor sentiment which do not fade or change for more than a few years, as retail investors’ build-up and condense their assets (of this representative closed-end fund). This gives the notion that sentiment may not only cause short-term swerves in discounts on entity funds, but also long-term variations in the average discount for all funds.

4.0.9 Data Sources

The data used in the analyses are obtained from two sources: the London Stocks Exchange market monthly bulletins and databases maintained by the London Stocks Exchange. Net asset values of closed-end funds on every end of the month, the number of shares outstanding at the funds’ initial public offerings, their holdings in major asset categories (stocks by sector, government securities by maturity, repurchase agreements and foreign exchange, etc), and individual securities included in their portfolios are acquired from the Monthly and quarterly Bulletins of the London Stocks Exchange market.

The end of the month closing prices of closed-end funds, the level of FTSE-100 composite index, and end-month closing prices of all the stocks listed on the London Stocks Exchange are obtained from the databases maintained by the London Stocks Exchange. Closing prices are adjusted for stock splits and stock dividends.

In the same way, the number of shares outstanding for each stock and closed-end fund is attuned for stock splits and stock dividends.

Splits are very much widespread and frequent for stocks listed on the London Stocks Exchange. In the process of working with the price and the net asset value data for the United Kingdom closed end equity funds, it was observed that some funds are slow to report the change in their number of shares outstanding after any form of split. Since the stock price is adjusted straight away after the split by the London Stock Exchange, this timing difference results in periods of artificially high discounts for closed-end funds. For that reason, in order to do away with the preconceived notion in our results with these “wrong reports”, net asset values of each fund are recalculated from total market value of their assortment holdings and their adjusted number of shares outstanding for the whole sample period. What is more, some funds adjust net asset value of their portfolios, with respect to their dividend payments before the ex-dividend day, resulting in artificially high premiums. Similar to the stock split adjustment, if incorrect adjustments are seen with the effect of payment of dividends, net asset values are checked and put into tact by adding dividend payments to the net asset value of the portfolio before the ex-dividend day.

Information and statistics on the number of different sectors and stocks in a fund’s portfolio are got hold of from the monthly reports of the closed end equity funds published in the London Stocks Exchange monthly bulletins.

The fraction of the fund shares held by the public is acquired from the databases maintained by the London Stocks Exchange. Ownership structure data and administrative expenses are obtained from the Annual Yearbooks of Companies published by the London Stocks Exchange.  4.1.0Empirical Findings

First, the distinctiveness of United Kingdom closed-end funds over the sample period are presented in this section. Then, the domino effect of the empirical analysis of the determinants of closed-end funds discounts is discussed. The estimates for bank and non-bank affiliated funds and for the crisis and non-crisis periods are also presented.

 4.1.1 Characteristics of United Kingdom Closed-end Funds

The discount is the norm for United Kingdom closed end funds during the period between January 2006 and May 2011. Maintaining the price within a reasonable price range is a common explanation given for stock splits.

These adjustments did not consequence in any loss of data. Dividend payment and stock gash corrections are done for a minimal of the stocks listed in the London stocks exchange market. For that reason, they are not probable to sway the result of this study. The discounts rise and fall each and every month in the United Kingdom. The funds are traded at premiums over some periods in the time that this study explore focuses on. In particular the periods are just before the financial crises that led to the worldwide recession.

The discounts on bank-affiliated funds and funds established by other financial intermediaries or individuals illustrate some differences. Regardless of the fact that bank-affiliated funds a lot of times do business at a premium, funds operate at a premium in some periods, non-bank affiliated funds trade at a discount more or less all the time during our sample period. In broad-spectrum, the discount on non-bank affiliated funds is larger than that on bank-affiliated funds. After the crisis, the bank-affiliated funds were trading at a higher discount than the non-bank affiliated funds. The average value-weighted discount is more than 10 percent, which is more or less the same as the discount reported for the U.S. closed-end funds (Weiss, 1989; Lee, Shleifer and Thaler, 1991). Nevertheless, there are large fluctuations across funds in terms of middling discounts. The average discounts on individual funds during this period fluctuated a great deal. The figure here below shows performance of different funds over the period of an year in terms of the discounts associated with them.

Fund, owned by a bank, has the largest net asset value per share during the last five years in the UK closed end equity fund market. There is not a major deviation in the net asset values of the left behind closed end funds.

There is no chief requirement among the UK closed-end funds in the terms of application of assets and investments in definite industries. There is the notion that a majority of the funds prefer to invest in holding and investment companies, banks and stocks of companies.

Majorly, United Kingdom closed-end funds as well as bank and non-bank affiliated funds function with premiums and discounts which continues to be a mystery how the performance is interlinked with the discount aspect. The standard rate weighted discount is lower for bank-affiliated funds than the standard value-weighted discount for non-bank affiliated funds. The proposition of parity means a number of the fund distinctiveness for bank and non-bank affiliated funds are put into test using a t-statistic. There is the unearthing that there is a noteworthy disparity amid bank and non-bank affiliated funds in each of these characteristics except the number of industries invested in. These stocks are from the companies working in diverse industries on common. Even though bank and non-bank funds are analogous in terms of the number of sectors that they invest in, non-bank funds endow further in the smallest stocks in comparison to the bank affiliated funds.

To add up to the portfolio characteristics, United Kingdom closed-end funds diverge in terms of their tenure configuration. On average, 64 percent of the resources of bank-affiliated funds is held by the public, but the average public stake is only 53 percent for non-bank affiliated funds. The proportion of fund’s shares held by the largest shareholder is 35 percent for nonbank related funds and 23 percent for bank related funds.

In spite of the fact that there is a negligible distinction in the magnitudes of managerial everyday expenditure and net asset values of bank and non-bank related funds, they are revealed to be to a vast degree diverse at a definite proportion. The earnings rate of bank-affiliated funds is considerably higher than that of the non-bank affiliated funds. What is more, compared to the non-bank affiliated funds, the bank affiliated funds seem to spend more often than not in larger company shares.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 5: Conclusion

There is comprehensive appraisal of the recent and contemporary work on closed end equity funds in their performance with correlation with the discounts and premiums in the United Kingdom market. This has been achieved by massive center of attention on the London Stock Exchange market. Being more precise, the study carried out in this paper has majorly focused on the closed end equity funds for which investors are claimed to misestimate the impact managerial skills have on the rate of discounts on the funds. Index funds have a propensity to trade at a noteworthy discount, and this probably accounts for their rarity, in view of the fact that it discourages novel issues. There is the presence of sizeable substantiation that professed managerial skill affects discounts on actively managed funds, both from the cross-sectional model of discounts and from the tendency for discounts to be more volatile on actively managed than on index funds. It is minimally accurate and precise that managerial skill accounts for the general predisposition for funds to trade at a discount. Costs on management are conspicuously lower on older funds, in direct contradiction of the assumptions in Berk and Stanton’s (2007) model, which combines tentative managerial skill with coherent investors. In particular the managerial skill supposition cannot explain why index funds also typically do business at a discount.

In this investigate study, there is the execution of a simple test of Lee et al.’s (1991) hypothesis that closed-end funds trade at a discount due to the fact that discount risk is to some extent methodical. The results acquired give the suggestion that, in spite of the fact that closed-end fund shares put on show surplus return volatility relative to their underlying assets, discount risk is more often than not idiosyncratic, with the systematic element for the most part restricted to the very highly composite funds. The investor sentiment explanation of discounts of Lee et al. (1991) is that they exist due to the fact that an investor who holds closed-end funds carries superior portfolio risk than one who holds open-end funds. This research study bases its argument on the fact that there is some truth in that theory even though discount risk is majorly purely distinctive, for the reason that, in a world with dealings costs, investors only hold a small number of risky assets, each of which represents a crucial slice of the portfolio. In such a world, it is the superfluous fickleness of closed end equity funds profits rather than the methodical element of discount risk that is vital for portfolio risk.

This research study paper has examined how noise trading and costly arbitrage proceed in concert to form basis of the asset prices to swerve from elementary values. The center of attention has been on closed end equity funds due to the fact that they have crystal clear prices and values. A few questions are taken into consideration throughout this research study: the reason why there are deviations and variations of the price relative to net-asset value (i.e., why there are fluctuations of the discount), why there is an average discount in the long-run and how the discounts affect the performance of the closed end equity funds in the United Kingdom. This study was done in contemplation with the period of the last five years.

In consideration of the deviations and variations of the discount, there is the sighting that they are strongly slanted by small-investor sentiment from month-to-month and possibly from year to- year. Using disaggregated flows to quite a lot of individual U.K. sectors over 65 months, there is credible evidence that retail flows to a meticulous segment have a very noteworthy manipulate on the contemporary level of the discount. Noise generated by small investors also has some effect on the prices of the security assets held by the closed end fund. There is also the discovery that, over the last 30 years, that when small investors trim down their holdings of the largest U.K. closed-end fund, its discount tends to enlarge.

The allusion is that noise may have a low-frequency, as well as a high-frequency, impact on asset prices. In correlation to the fact that there is the subsistence of a long-run discount on closed-end funds, it is found that it is not an incongruity. Noise trading causes a fund’s price to move in connection to net asset value, but that digression and discrepancy is controlled by upper and lower arbitrages. For a fund which is not easy to follow and imitate, it is probable for a large discount to build up before arbitrage or open-ending is profitable. By lack of correspondence, a large premium does not exist for very long because fresh issues can be launched speedily, which is profitable for the executives. The interconnection and linkage between noise and arbitrage, the former moving the price and the latter restricting its variation to a specific sector give rise to the existence of a discount. In adding up, when arbitrage is costly the executives have the lack of precincts to set relatively high charges and this contributes to the discount.

Cross-sectional data on 158 U.K. funds over 1991 to 1997 substantiate that the discount is hefty for funds which are elite to arbitrage, that is, for those which are not easy to mimic, are diminutive, and often possess near to the ground dividend yields. Such funds also have high executive operating expense. The hypothesis that the discount is the result of a priced sentiment factor, along the lines suggested by DSSW and LST, is not supported in the cross-section. Noise traders never seem to appear to “generate their own rewards”.

Numerous questions are yet to be answered even after this study was carried out and hence there is still room for further research and studies in the same area of study. Investor sentiment may be related to the level of the stock market, but what causes investor sentiment to become so positive that fresh issues of closed-end funds are possible? One possible answer would be if other avenues for particular investment do not exist at the time, so small investors worry about the covert opportunity loss from not investing without more ado.

On the other hand, level-headedness would also have need of small investors in fresh funds being well knowledgeable, whereas there is evidence from both the U.S. and U.K. that they are not (Hanley, Lee and Seguin (1996) and Gemmill and Thomas (1997)). In this the avenue taken by this study is of the same mind with LST who observe that “closed-end funds are a device by which smart entrepreneurs take advantage of a less-sophisticated public” (page 84). The matter is extremely momentous, for the reason that it implies that tighter directive of financial services may be advantageous.

An additional plausible line of research concerns the governance and open-ending of funds. U.S. research indicates that funds with less autonomous executives have higher operation costs (Dann, Del Guercio, and Partch (2000)), redolent of a conflict linking shareholders and the board. It is still a mystery that wide levels of discount can hold on to existence for such very longest periods of time without any take-over bid taking place. Barclay, Holderness, and Pontiff (1993) relate this to friendly lump holders who resist open-ending, but another case scenario is that administration groups have interconnected and interlinking directorships, leading to inherent conspiracy across funds (Rowe and Davidson (1999)). Anecdotal evidence in the U.K. indicates that fund managers do not take on in ravenous performance for fear that other managers will not support their fresh issues after that. Much more might be discovered in this area.

There would be a key concentration and consideration to evaluate and contrast the cross-sectional tests between the UK funds with the US counterparts’ data and for that reason provide evidence that, in a diverse environment, that it is the interaction of noise, expenses and arbitrage, which causes closed-end funds to do business at market prices that are less than elementary values.

The extent of the discount in the London Stocks Exchange market is different from that pragmatic for closed end equity funds in the U.S. market. In addition, the discount on United Kingdom closed-end funds varies and deviates widely over time just like the discount on the U.S. funds does.

Consequent to researching and analyzing the discount and its variability, the factors affecting this discount is put into focus as the main criterion of the study for the funds bought and sold on the London Stocks Exchange with a cross-sectional analysis. The conclusion point in the direction of that when analyzed in a univariate setting, there is a differentiation amid discounts on bank and non-bank affiliated funds. This finding majorly supports the purported strong position of banks in the closed end equity fund market in the United Kingdom.

An interface variable between bank and calamity variables is created and the model with this variable is estimated for the entire sample, it is established that bank-affiliated funds have radically lower discount than nonbank affiliated ones but when we consider crisis, they have higher discount than the later funds (Malkiel 1995). The coefficient on the interaction variable is found to be significant at 1 percent.

On the other hand, when analyzed in a multivariate setting, this distinction in discounts on bank and non-bank affiliated funds disappears. What is more, multivariate analysis sustain agency expenses explanation of the discount. In addition, income on the market index, degree of diversification, the stock holdings and liquidity of funds are found to be very much momentous factors elucidating the discount on closed-end funds.

First, this study shows that the findings in the developed markets cannot be generalized to each and every market since they have diverse characteristics like when the UK closed end fund market is compared with that of the US. Second, similar to the U.S. market (Malkiel, 1995), tenure arrangement is not an imperative variable that explains the discount observed in this United Kingdom market. Third, the perceived role and the reputation of intermediaries in UK financial organization may be rather dissimilar from that of the United States of America. For this reason, all of these effects have to be put into contemplation in making investment decisions in the United Kingdom market.

A small number of problems in finance are as confusing as the closed-end equity. Closed end equity is a mutual fund which more often than not possesses other publicly traded securities. Close end equity issues a unchanging numbers of shares that are traded on the stock market. To settle a holding in a fund, investors have got to put on the market their shares to other investors rather than exchange them with the fund itself for the net asset value per share. The closed-end fund conundrum is the experimental finding that closed-end fund shares usually put up for sale at prices not equivalent to the per share market value of assets the fund possesses. Even though equity at times sells at premium to their net asset values, in recent years discounts of 10 to 20 percent have been the custom. The latest augment in the standard level of the discount amongst UK closed-end funds has put the industry under analysis. Funds that cannot keep the level of the discount within an acceptable range are at risk of disappearing and at present at least one closed-end fund each month is announcing restructuring or wind-up arrangements. At the same time, there are still a number of new floatation’s of closed-end funds. Time-honored funds that meet up a perceived need will survive. For some managers, European monetary union will provide a further opportunity to bring closed-end (as well as open-end) funds to investors all over Europe (Elroy D. & Carolina M. 2002).

Throughout this research period, the study seeks to demystify the existence and interconnection of the discounts on the closed end equity funds in the United Kingdom with major assistance from the London Stocks Exchange.

 

 

 

 

 

 

Chapter 6: Reflection

Throughout this study, there were some difficulties in the collection of data. This could be improved by taking an average of the active stocks in the closed end equity fund market in the United Kingdom. I felt that the trends of the discounts on the closed end equity funds are not easily predictable and may also be affected by natural calamities like the volcanic eruption in 2010 affected the markets. The stocks with premiums nose-dived into discounts to encourage more investors to buy their shares. The closed end funds operate at most times on discounts and even after the end of this study, the mystery connecting them is yet to be fully cleared. With the emergence of new funds every moment shows that some do prosper while at the same time others disappear giving the notion that there are also some failures.

Just like the open end funds, the closed end funds are affected by investor sentiments so for it to prosper, it must instill confidence in the investors on its reliability. Furthermore for efficiency, it must be consistent and not varying extremely. Funds that are highly prevalent to investors are the ones that trade in premiums or are highly to trade in premiums in the future.

Sectors weighting

Multi-Strategy

30.00%

Event Driven

22.00%

Distressed Securities

19.00%

Convertible Arbitrage

15.00%

Equity Long/Short

14.00%

FTSE 350 share price graph above

Change
  Burberry Group PLC 4.16%
  Tullow Oil PLC 1.97%
  British Sky Broadcasting Group PLC 1.94%
  Petrofac Ltd 1.94%
  Fresnillo PLC 1.88%
  John Wood Group PLC 1.41%
  J Sainsbury PLC 1.23%
  Gkn PLC 1.10%
  Old Mutual PLC 1.08%
  Scottish and Southern Energy PLC 1.07%
Change
  Inmarsat PLC -3.25%
  Rolls Royce Holdings PLC -2.50%
  Lloyds Banking Group PLC -2.48%
  Vedanta Resources PLC -1.97%
  BHP Billiton PLC -1.93%
  Smiths Group PLC -1.87%
  ARM Holdings PLC -1.83%
  Itv PLC -1.77%
  Kazakhmys PLC -1.56%
  WPP PLC -1.53%

Global equity markets ended 2010 on a strongly positive note. The MSCI World Index rose 9.1% in US dollar terms in the final quarter taking the return for the year as a whole to 12.3%. (Standard Bank)

Japan and North America led the rally, rising by 12% and 11% respectively, while continental Europe lagged, rising 4%, and thus just managing to put in a positive gain for the year of 2.4%. (Though the EMU/Euro member countries within Europe actually fell 3.4% over the year). (Standard BANK)

UK was stuck halfway between the leaders and laggards at 8.8%. This was the rate at which the closed end fund traded at a discount (These are figures obtained from Standard Bank)

2010 also comes to a close on an optimistic economic note, with data releases on balance continuing to surprise to the upside and analysts continuing to upgrade corporate earnings expectations for 2011. Despite the fact that not for that reason at difficult to deal with valuations, the major questions for 2011 remain how markets may act in response were global interest rates and bond yields finally to rise to more typical levels, now a good deal extra the system in emerging markets might tighten policy, and how the problems of the Euro zone will develop. (an excerpt from the annual reports from Standard Bank).

Fund Performance for 2010 as a whole the fund rose by 15.1%, 2.8% ahead of the index return of 12.3%. (MCSI fund Index)

Efficiency of the approach 2010 as an entirety has seen something of the “return to rationality” which was equally anticipated and hoped would occur, with investors focusing on underlying company profitability and rewarding those companies whose prospects were improving the fastest and greatest. (an excerpt from the annual reports from Standard Bank).

An interesting aspect of 2010 was perhaps the historically low spread of returns across companies, with the best outperforming the worst by a smaller than average margin. As the “easy” earnings growth is likely to be behind us, we might expect this gap to be wider in 2011, hopefully to our advantage. (an excerpt from the annual reports from Standard Bank).

 

 

 

 

The 2010/2011 tax year was the second best in 10 years with net ISA sales of £3.7 billion.  The ISA season, covering the period 1st March – 5th April 2011 was the best in 9 years with net sales of £956 million.  ISAs make up 18% of all authorized funds under management.

NET RETAIL ISA SALES

Tax Year

Full tax year

Q1

1 Mar to 5 Apr

1 – 5 Apr

Jan – 5 April

2010 – 11

£3,677 million

£685 million

£956 million

£349 million

£1,034 million

2009 – 10

£3,991 million

£1,070 million

£847 million

£152 million

£1,222 million

2008 – 09

-£305 million

£395 million

£617 million

£208 million

£603 million

2007 – 08

-£1,677 million

-£449 million

£319 million

£256 million

-£193 million

2006 – 07

-£887 million

-£198 million

£648 million

£423 million

£225 million

2005 – 06

-£1,251 million

-£70 million

£547 million

£321 million

£251 million

2004 – 05

 -£1,187 million

-£136 million

£530 million

£327 million

£191 million

2003 – 04

£1,645 million

£255 million

£476 million

£247 million

£502 million

2002 – 03

£1,538 million

£91 million

£459 million

£248 million

£339 million

2001 – 02

£3,308 million

£847 million

£1,158 million

£591 million

£1,438 million

2000 – 01

£5,862 million

£1,527 million

£1,518 million

£633 million

£2,160 million

NB: From January 2008, ISA figures are based on ISAs provided by fund companies and five platforms (Cofunds, Fidelity, Hargreaves Landsdown, Skandia and Transact). Figures for earlier years cover slightly less platform business. All figures include former PEPs. /m

 

 

 

 

 

 

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Appendix: The Discount and Expenses

As of the fundamental theorem that ‘a portfolio of shares is worth the present value of future distributable cash flows’, we have the expression for a fund’s net-asset value:

tNAV tCt /(1 r) 0 =å + (A1)

Where C is expected cash flow (i.e., payouts to shareholders holding the fund’s underlying portfolio),

r is required rate of return and t is a time subscript.

The market value of a closed-end fund may be written as:

tt t t P (C X ) /(1 r) 0 =å – + (A2)

Where: P is market price and X is expenses. Defining the discount as

0 0 0 0 DIS = (NAV P ) / NAV (A3) and using this definition with (A1) and (A2) we may write:

tt ttt t tC rK C rDIS/(1 )/(1 )0 ++= åå (A4)

where Kt is the ratio of expenses to cash flow in period t (= Xt / Ct ). If this ratio is constant in each period, then we have the very simple result that the discount on a closed-end fund must be constant  and equal to the expense-to-cash flow ratio at time zero, i.e., 000 CXDIS = .

lllconstant  and equal

TIDM Name Price +/- %+/-
YELL YELL GRP.

7.39

+0.91

+14.04

AYM ANGLESEY MINING

63.25

+5.00

+8.58

BARC BARCLAYS

239.85

+17.25

+7.75

HWDN HOWDEN JOINERY

114.40

+7.00

+6.52

LLOY LLOYDS GRP.

47.56

+2.65

+5.90

RBS ROYAL BANK SCOT

36.05

+1.94

+5.69

KGF KINGFISHER

267.40

+14.20

+5.61

888 888 HLDGS

34.75

+1.75

+5.30

HOIL HERITAGE OIL

252.20

+12.70

+5.30

CGL CATLIN GRP

409.60

+17.60

+4.49

 

TIDM Name Price +/- %+/-
COLT COLT GRP S.A.

114.00

-17.80

-13.51

GMG GAME GROUP

27.75

-1.75

-5.93

FLYB FLYBE GRP

173.75

-9.75

-5.31

HFD HALFORDS

341.50

-15.70

-4.40

IPO IP GROUP

46.25

-2.00

-4.15

WLF WOLFSON MIC

172.75

-7.25

-4.03

ALN ALTERIAN

95.00

-3.75

-3.80

RNK RANK GRP.

145.00

-5.70

-3.78

DTZ DTZ HLDGS

39.50

-1.50

-3.66

WIN WINCANTON

112.75

-4.25

-3.63

List of tables

Net retail ISA sales……………………………………………………………………….76

Performance of global growth investment trusts……………………………………….83

List of graphs

 

Sociology

July 22, 2011

ASSIGNMENT

Student Name:

Student Number:

Course:

Professor:

Answer # 1

The scope for ‘private family’ has increased since 1900 in the way that the bride’s parents or any other relatives may also come to stay with the couple. Also, grandparents staying in a private family have become common. Marriage changed during the late 1700s and early 1800s as it started becoming a more equal affair, where both partners started working and contributing to make the financial ends meet.

 

Answer#2

Yes, fathers are capable of nurturing children although most fathers are likely to do a worse job of it than mothers. Transnational families struggle with finding their true identity, given that they are caught in a maze of different cultural backgrounds. They might be confused as to how to raise their children and in which culture. They, however, have the advantage of adapting quickly and this can be passed on to the children as well.

 

Answer#3

Role of education has drastically changed in the marriage markets in the last few years. While earlier, it was hardly considered as a factor, most men today are unlikely to accept a marriage proposal if the girl has not studied until a basic level. Further, the importance of education has gone up in women’s minds as well, and they look at the education and profession of their prospective husband first before anything else.

 

Answer#4

“Ethic of care” means the human trait or ability of being able to care or look after someone especially a dependant. The life of a typical married man has changed to the extent that he is now expected to be an equal partner in bringing up and taking care of a child.

 

Answer#5

Single parents may not be able to do as well as two parents since the parenting done by fathers and mothers is much different and good parenting requires a right combination of both. Fathers have a protective and broad outlook of parenting while mothers have a loving and short-term outlook of parenting.

 

Answer#6

Older women are generally unhappy or depressed due to lack of their ability to work while older men tend to get much lonelier. Great declines in adult mortality and fertility have prolonged the old age and hence have developed the need to be healthy, working and having company of the other sex throughout the old age.

 

Answer#7

Yes, most fathers would stay in touch with their children after the divorce. In fact, many of them often fight vehemently fight for custody and visitation rights after a divorce. Effects of divorce on children are likely to be more than just out of genetic inheritance as a child faces a conflict situation in his life which is bound to affect him emotionally and mentally.

 

 

Sociology

July 22, 2011

Why might Mexican American and Puerto Rican family patterns be different? The histories of both Mexico and Puerto Rico are quite different. Mexicans that have immigrated to the United States have been influenced by the American culture and values. While both countries may have Latino roots and a language in common, they are also living and immersed in vastly different experiences and cultures. In both cases the families may be bigger and have elders or extended families living with them. Mexican Americans may have been more influenced with other aspects of America such as more incidents of cohabitation, childbearing out marriage and divorce. (p. 9) Puerto Rican families may be more protected by growing diversity and liberalism from the United States. The family patterns are traditional in nature. The Patriarchal family unit is more revered. The mother may more often choose to stay home and care for the children, or grandparents may live with the family and care for the little ones. Why might middle- class African American families have more difficulty maintaining their status than middle- class white families? African America families face many problems that white families in the middle may not. One of the main factors that can separate successful people is education. “A person’s education is a more important predictor of the kind of family life he or she leads than it was in the past.” (p.112) This is even truer now, when the economy is in a downward spiral and job competition and the labor market is so tight. College educated parents may have less instability in their employment. They also may receive better benefit packages in their careers and this can affect the overall budget for a family. Many black households are headed by single African Americans and this will also have a major affect on the struggle to maintain a middle class status. The mother may need to work two jobs, or a teenager in the family may need to work to contribute to the family. What cultural features of American society influence people’s senses of their sexual identity? The American public’s sexuality in this country is heavily influenced by our media. At young ages, kids are bombarded with messages, images and more. Even if you attempt to protect your child from this, they will more than likely pick up on something with sexual overtones from classmates at school, especially the older they get. Movie previews with strong sexual content may flash on our TV screens before we can even change the channel. The main networks have steadily pushed the envelope on sexual language, images and content on shows, which usually was left for special programming like paid cables networks such as HBO and Showtime. Many reality shows now regularly feature sexual scenarios, dating shows and the like. Determining our “sexual identity” is a new concept. People are now talking about this openly and it is o.k. to have a frank discussion about it. It is considered normal and natural. (p.179) Not too long ago even in the popular show “I Love Lucy” Lucy and her husband Ricky even though married had separate twin beds. Nowadays, shows have no problem showing scenes of casual relations and sex between unmarried people, affairs and etc. There are shows also depicting characters that are homosexual and it is all deemed natural and there is no stigma attached. Back in the day, homosexuality was actually seen as a “psychological illness”. Why has concern about teenage pregnancy grown if the likelihood that a teenager will give birth has been declining? Teenage sexuality is very common and on the rise and increased in the middle class and among the poor and African Americans. (p.198) With increased sexual education is schools and an emphasis on being safe and having protected sex has had an impact on the teenage pregnancy statistics. According to the U.S National Center for Health Statistics to Prevent Teen Pregnancy, teenage pregnancies accounted for 50% of all nonmarital births and 29% in 1999. (p.201) This group still works to reduce this rate for the sake of the young people involved. Teenage pregnancy can destroy lives. If a baby is aborted it is a loss life. The birth rate is more than likely declining because abortions are relatively easy to obtain. Some girls are counseled on how to obtain an abortion without their parents consent. As well, the involved pregnant young woman’s life will be dramatically changed in a negative way if she has an abortion. She may live a life of regret for the rest of her days. Sometimes young people may runaway if in trouble and end up getting in even more hot water. Young people may get married young or live together if a woman gets pregnant. These situations can cause hardships for the young couple, they may have to drop out of school and suffer domestic problems. She may have to raise the child on her own if she chooses to have it. What are the symbolic rewards of being married in the United States today? Some of the symbolic rewards are companionship, stability, affection, friendship, sexual gratification, and happiness in being a spouse, parent and part of a family unit. What distinguishes the individualized marriage from the companionate marriage? The differences between the two types of marriage are; in the individualized marriage each partner is free and able to fulfill their own interests and embark on self discovery, intimacy and grow in a personal and individual way. These couples may consider each other their soul mate and able to communicate on a deep and intimate level because of their personal growth. In the companionate marriage the couple is seen more as a team that completes each other and can best be successful and happy by fulfilling each other’s needs. They can do this by being affectionate with one another, be good friends, having a satisfying sexual relationship and etc. (p.221) How narrowly or broadly should domestic violence be defined? Domestic abuse should be defined as violence among people who have an intimate relationship together and have experienced or engaged in abuse. Since nowadays so many are cohabitating it can’t be identified solely as married partners. And some couples can be dating and not cohabitating so they are really not “domestically” living in the home together and yet violence can break out. It should be reserved for “intimate partners” or relationships. The actions involved in domestic violence can range the gamut from slapping, to yelling, hitting and so on. It is fact that the cycle continues and increasingly grows more violent with time as better compliance or results are achieved with harsher treatment. That is why all behavior should be taken seriously. Either gender all can be guilty of carrying out the violence. Escalated and more dangerous actions are more often carried out by men. (p. 348) Abuse can also be in the form of emotional or physical in nature. Most of the data on the number of new cases of child abuse come from reports More than half of official reports of child abuse are related to neglect of the child. (p.362) It also is more prevalent in lower-income families. What is the origin of the myth of the wicked stepmother? The origin of the Wicked Stepmother has come from many fairytales, such as Cinderella, Snow White and Hansel and Gretel. The evil stepmother in Cinderella favored her own children and wished her biological daughters to marry the prince and not her stepchild Cinderella. (p. 421) They are depicted as hateful, mean and wicked. They are jealous and hate the new offspring. They have kind of replaced the witch who could be seen as less believable. The stepmother gets a bum rap and has a hard job of proving herself worthy to the children oftentimes. How concerned should we, as a society, be about the effects of divorce and remarriage on children? It is very concerning as our society depends upon stable families for the success of its future. If children do not witness happy and successful marriage growing up, they may not learn how to achieve a stable family when they grow up. They often emulate what they learn. This is concerning. Counseling and education on marriage could help with this aspect. Describe the differing perspectives of liberals and conservatives on the issue of the dependency” of the poor on government assistance. Liberals believe in a wide reaching and expanded government that fulfills the needs of all its citizens, especially the poor and feel compelled provide many benefits for them. It can create a sense of entitlement and dependency. This can be seen in families with generations of welfare dependence, from Grandma, to mother to daughter. Conservatives see the need for a safety net but also would like to create responsibility for “working” for benefits. This was seen with some attempts of Welfare to work” programs and reforms. They are in favor of smaller government and less social programs. Why is abortion such a contentious political issue? Abortion is a contentious political issue because one side sees it as a woman’s individual choice and right to terminate a pregnancy. They do not believe the government should have any say in this personal decision. They also usually do not recognize the fetus as a baby until birth. Others on the Right, believe that the right of the innocent child trumps the right of the mother. And they also recognize the fetus as a baby from conception and point out that it is more than cells when it can have a heartbeat at 10-12 weeks. It is also a point of religion vs. secular. Works Cited Cherlin, Andrew, Public and Private Families: An Introduction, 6th Edition

Summary

July 22, 2011

Binding of Munc18-1 to Synaptobrevin and to the SNARE Four-Helix Bundle†

It is unclear how Sec1/Munc18 (SM) proteins and soluble N-ethylmaleimide bind to form part of the core intracellular membrane fusion system as it is proposed they do so. It is proposed that synaptic vesicle SNARE synaptobrevin and plasma membrane SNAREs syntaxin-1 in conjunction with SNAP-25 are merged in a tight knit four helix SNARE formation. Munc18-1 binding to snare formations has been linked to membrane fusion formation when linked up with synaptobrevin. Membrane traffic is under the control docket of machinery put together by mergers of several protein families. The most common and important being Munc18 (SM) proteins and soluble N-ethylmaleimide.

The primary function of the SNAREs is the control neurotransmitter release. This became evident from observations and studies on synaptic vesicle protein synaptobrevin and the plasma membrane proteins syntaxin-1 and SNAP-25. The studies revealed that SNAREs form tight “SNARE complexes” with the important aid of sequences called SNARE motifs (6). These SNARE motifs form a four-helix bundle (7, 8) that brings the two membranes into close proximity (9), which is key for membrane fusion (1-5). As a result of this they are able to perform their core function. However, despite intense research, the function of the SM proteins is not known. There were however attempts to put on book the functions of SM proteins and various proposals were put forth but no harmony reached at. This confusion was however cleared partially by SM proteins generally bind to SNARE complexes and that the syntaxin N-terminal

Sequences often contribute to binding thus making these proteins essential in the control neurotransmitter release. This thus made a presumption that underlying core function of SM proteins is formation of SM protein-SNARE complex assemblies. It is worth noting that, Munc18-1

Binding to the SNARE complex enhances SNARE-dependent lipid mixing in reconstitution and is critical for neurotransmitter release that depend on the interaction of Munc18-1 with the syntaxin-1 N-terminal.

Research however show that these interactions do not appear very cogent  for downstream events that amount and are essential to Ca2þ-triggered release (32) and it is unclear how binding of

Munc18-1 to the syntaxin-1 N-terminal region is helpful to induction of membrane fusion.

On Experimental procedures on protein Expression and Purification, These data do not clarify whether the SNARE four-helix bundle binds to Munc18-1. To categorically try and give answers to this question, binding of Munc18-1 to SNARE complexes containing synaptobrevin-61-Rho or -TR and lacking the syntaxin-1 N-terminal region (i.e., using a syntaxin-1 fragment spanning residues 191-253) was done. Significantly, these complexes showed notable FRET with Munc18-308-BP and less efficient FRET with Munc18-125-BP. shat the SNARE four-helix bundle may bind to the same cavity of

Munc18-1 as the syntaxin-1 closed conformation.

It is clear that SM proteins are central components of the intracellular Membrane fusion machinery; however their main role is still not clear despite research. His uncertainty arises in part because of the diversity of SM protein-SNARE interactions that have been identified and in part because no definitive evidence has been presented for the various models of SM protein function. Observations have suggested that the key function of Munc18-1 and SM proteins in membrane fusion involves interactions with the SNARE four-helix bundle.

 

 

 

Works Cited

Xu, Yi , Lijing Su, and Josep  Rizo. “Binding of Munc18-1 to Synaptobrevin and to the SNARE Four-Helix Bundle.” Biochemistry Journal 10.49 (2010): 1568

Hotel Tourism Industry in Turkey and Kuşadasi Onura Hotel

July 21, 2011

Hotel Tourism Industry in Turkey and Kuşadasi Onura Hotel

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

 

Abstract ………………………………………………………………………………………………….

Introduction …………………………………………………………………………………………… 

Aims and objectives of the study……………………………………………………………..

Literature Review…………………………………………………………………………………..

Methodology…………………………………………………………………………………………. 

Findings and Analysis……………………………………………………………………………

Conclusions and Recommendations……………………………………………………….

Appendix……………………………………………………………………………………………..

References……………………………………………………………………………………………

 

 

 

 

 

 

Abstract

Tourism has been one of the biggest service industries in the world. It is one of the biggest contributors of the GDP of the world. The industry suffered a jolt because of the economic recession in 2008. However, since then the economy has recovered and so has the tourism industry. The future looks bright for the tourism industry with the number of visitors increasing. The same is true for the Turkish tourism industry too. The Turkish tourism industry has been growing over the years. The Government has played a huge role in the development of the tourism industry. The history and culture as well as the geography of the place have been an added advantage to the Turkish tourism industry. The country lies in the crossroads of civilizations of Asia and Europe and thus the culture is a mix of both the traditions. People coming here can sense the features of both the cultures. The components of the tourism industry like hotels, travel agencies etc have increased in Turkey to assist the tourists in their travel. A new addition has been the medical tourism in the country with world class medical facilities available at cheaper prices than that in the other countries. However, the country has not been able to attract tourists at t frantic pace that was expected of it. This is because of the lack of marketing promotional strategies by the tourism industry of the country. Though the Government and the tourism industry of Turkey have worked a lot in the promotional arena to attract tourists, the effort has not resulted in huge influx of tourists. The paper deals with the case study of Onura Hotel in Kusadasi region.  The hotel has been facing certain problems with the operations. A mixture of qualitative and quantitative technique of research has been applied in the paper to find out better ways to improve the operations. From the research it has been found out that the management has been inefficient in dealing with the operation of the hotel. The main objective should be to form an identity of the hotel. The management has not been able to construct the brand identity of the hotel and has not marketed well the image of the hotel to the global customers. The hotel at present is dependent on the travel agencies and tourism agencies for the influx of tourists. This is detrimental to the performance of the hotel as the influx of tourists is dependent on the whims of these agencies. The management has to employ various marketing techniques to make the customers aware of the hotel. This will make the hotel less dependent on the travel agencies. The case study of the Onura Hotel has been taken as this gives a fair representation of the hotels of Turkey in general and will form a good reference for the analysis.

 

 

 

 

 

 

 

 

 

 

Introduction

Globalization has increased the pace of the services tremendously in the world.  The technological revolution that began with Internet has brought the people in various parts of the world closer to each other. Borders are fading away. Trade blocks and continental economic unions are developing. Shortly, the world is going through a process of interconnectedness. With the help of globalization, the trade between the countries has increased and people can move from one country to the other more freely. The globalization has also increased the sharing of information easier. Thus people can go to the other countries with sufficient information. People can choose the destinations more carefully and can go to their destined places. The financial integration of the different parts of the world has made it easier to transact between the countries of the world. (Advantages of Globalization, n.d.; Advantages and Disadvantages of globalization, n.d.). Tourism industry is positively affected from this process.  Tourism industry is a rapidly developing industry in the world.

The Global tourism industry suffered due to the terrorist attacks in USA on 9/11. The influx of the tourists in and out of the US decreased to a huge extent in the latter years. The trend was visible all over the world. The European tourism industry also suffered with decreasing trends in the inbound and the outbound tourists. There are two important components of the tourism industry – destination and the supporting industry. The European tourism industry benefits from having a great range of destinations. However, the supporting industry suffered. The tourists were susceptible to move out to destinations by the airlines. The airline companies suffered due to the unavailability of the travellers. This trend was visible also in the case of the business class travellers. The travellers were unwilling to stay for a long time. (Porras, 2003). After the lull period of the start of the new millennium, the tourism industry went upwards. The growth of the industry was positive. The industry created 27 million jobs. However, the recession of 2008 took a toll on the industry. The growth rate dipped to negative in 2008 in terms of GDP. (Coward, 12th March, 2009). At the aftermath of the recession, the global tourism industry showed signs of recovering from the slump. In the latter part of 2009, there was an increase in the transportation of tourists. (Chu, April, 2010). The Tourism industry is the largest service industry of the world. It accounts for about 9.7% of the total GDP of the world. (Cooray, n.d.).

Turkey is a unique country in the world which is situated at the crossroads of civilization. The country is situated between the continents of Europe and Asia and serves as a connector between the two continents. The country is between the Black Sea and the Mediterranean Sea. The country was formed after the abolition of the Ottoman Empire under the leadership of Mustafa Kemal. The history and the geography of the country attract a number of tourists from the world over. The infrastructure of the country has been developed which has attracted a lot of foreign investments. With the development of the infrastructure, the tourism industry also developed. The components of the industry like the hotels, tour operators etc. have increased in numbers to make travelling a beautiful experience. (Turkey, n.d.). Tourism has become one of the prime earners of the GDP of the country. The paper will look into the state of the tourism industry in general in Turkey. After analyzing the tourism industry of the country, the paper will look into the case of the Onura Hotel. The analysis will be directed to make the hotel a more effective and profitable one. The hotel should be at par with the international ones.

The paper will be divided into the following sections: Literature review, Research Methodology, Recommendations and Conclusions. The analysis will be done step by step. This will help to make the project a viable one.

 

AIMS AND OBJECTIVES OF THE STUDY

The aim of this project is to analyse the hotel management of Onura Hotel in Kuşadası within the context of the Turkish tourism and hotel industry, to reveal out the major issues including opportunities and threats facing the Onura Hotel. Thus the aims and objectives of the study can be listed as follows:

  • To analyse the tourism industry as a whole in Turkey.
  • To analyse the threats and opportunities of the Turkish tourism industry.
  • To analyse the hotel management of the Onura Hotel in Turkey.
  • To analyze the opportunities and threats of the Onura Hotel in Turkey,
  • To find out the chances of making the hotel a truly developed one.

 

 

 

 

 

 

 

LITERATURE REVIEW

Global Tourism industry

The global tourism industry has been one of the biggest contributors to the GDP of the world. The industry has been flourishing from the new millennium. There has been an increase in the number of travellers around the world. These travellers included both the leisure and the business ones. The growth of the tourism industry created many jobs. In 2007 alone, 234 million jobs were created. The contribution towards the global GDP was 10.34%. In fact some of the countries of the world like Mauritius, Hawaii, Haiti etc. depended a lot on the tourism sector. It has grown to be the largest service sector of the world. (World Tourism industry, n.d.; Global tourism industry collapses, 9th July, 2009; International Graduate, n.d.).

It has to be noted here that the subject of the study, that is Turkey lies in Europe and the general mode of discussion for the paper will pertain the happenings in Europe. In the case of tourism in Europe, the region receives the largest number of international tourists of the world. This is because of the presence of some of the most attractive destinations of the world like Switzerland, England etc. 60% of the global tourists descend on the continent  of Europe due to the presence of a large variety of destinations in the region. However, in the coming years, this percentage is going to decrease. It is expected that in 2020 the percentage will come down to 46%. This is because the other regions of the world are developing at a faster rate than that of Europe. The other regions of the world have developed because of the development of the transportation and communication with the rest of the world. The travellers today are looking for new destinations that would allow them to enjoy the serenity of nature or travel through time in the historical chapters of the world. Almost all the regions of Europe has been well documented in the travelling fraternity of the world and they are now not as interested as that of the past to visit these places. They are looking for newer destinations in the other parts of the world. In addition to these some recent happenings of the world had a large bearing on the fortunes of Europe as a travelling destination. The 9/11 in USA, the global recession of 2008-09 had a huge effect on Europe. As most of the regions of Europe are directly linked to the happenings of the other parts of the world, these happenings affected the influx of tourists. The recession resulted in the promotion of the low cost travel by the business houses that affected the tourism business in the continent. The travellers are now well aware of the happenings and they wait till the last moment for booking of hotels and flights. With the advent of the internet, the travellers are now more interested in booking of the flights and hotels from the comforts of their home and they generally want to avoid the travel agencies of the destinations. In the case of Europe too, the travellers, today are more interested in visiting unconventional places rather than England and Switzerland. There has been an increase in popularity of the Central and the East European nations as destinations. The general trend for the travellers in the choice of destinations generally includes some or all of the below mentioned features:

Good infrastructure

Good communication and transportations

Exotic locales

Pertaining to global health standards

Can be accessible from every part of the world

The country in general is safe for travelling

Environment is clean and refreshing

Most of the locales of Europe consist of the above mentioned features in general. However, the countries of the Eastern and Central Europe were generally avoided by the travellers due to the unsafe environment of the countries. However, with stringer Government control in the recent years, the situation in these countries has come under normalcy. As a result, travellers looking for unchartered destinations have begun to flock in these countries. The picture below shows the influx of the tourists in Europe up to 2003.

 

Source: Cabrini, 12th February, 2004

From the above picture, it can be seen that the influx of tourists has increased from the latter half of the 20th century. However, in the new millennium, the growth of the influx of tourists has decreased. This may be due to the recent happenings in the various parts of the world like the 9/11. However, another point in this regard is that the other destinations in the other parts of the world like Asia and the Asia-pacific region are coming up that have begun to attract the tourists. (Cabrini, 12th February, 2011)

Tourism industry in Turkey

It has been well documented that Turkey has great potential in the case of the tourism industry. It lies in the crossroads of civilization of the West and the East. In addition to this, the country also offers its tourist a large number of attractive locales that can cater to the various needs of the customers. The tourism, industry in Turkey benefitted from the number and range of attractive destinations on offer. Turkey has a rich history which offers the travellers to view ancient sites. The geographical features of the place allows Turkey to boast of seaside resorts as well as mountains. With the exception of few years like the 9/11 terrorist attack, the growth rate of the tourism industry in Turkey has been double digit. (Turkey’s tourism in 2007, 16th february, 2007).

Tourism sector is among the leading sectors of the Turkish economy and the sector produces around 4% of the GDP in Turkey. According to the statistics obtained from the State Institute of Statistics (SIS), earning obtaining in tourism was US$ 12.1 billion in 2004, which is an increase of US$9.7 billion from 2003. The number of foreign tourists visiting Turkey increase to 17 million in 2004, from under 14 million in 2003 (Turkey: Market profile,  Jun2005, p.  342). Among the countries visited the most Turkey ranks as the 11th one worldwide and its share in the world tourism sector is 2% (The Economist Intelligence Unit, 2005, pp. 55-56). Turkey ranked 15th in world tourism in terms of the number of visitors and around 1,5 million people were employed in Turkey’s tourism sector in 2003(Turkey: Market profile, Jun2005, p.  342).

 

Table 1: International Tourism Arrivals and Expenditures between 1998 and 2003

 

According to the recent figures for the incoming tourists into Turkey in 2004, 4 million visitors were from Germany, 1.3 million from the UK and 1.2 million from the Netherlands. The share of the German tourists was the highest, with 22.7%, followed by the US with 15.9% and UK with 7.9% (see Table2 below).

 

 

 

 

 

 

Table 2: Sources of international tourists in Turkey, 2004

 

The most tourist attracting regions of Turkey are the Mediterranean region centring on Antalya and the Marmara (Istanbul) attracting 70% of foreign visitors, and this is followed by the Aegean region with 20%. Mugla and Izmir are the other main tourist destinations, respectively accounting for 14.4% and 4.4% of tourist arrivals in 2004. A big amount of the foreign bookings, particularly for Turkey’s seaside resorts, are made through travel agents and tour operators that provide cheap package holidays. According to Euromonitor, a UK-based market research firm, package holidays accounted for 83% of travel agency sales in Turkey and 72% of tour operator sales in 2001. Also in 2001, 4,376 travel agents and 18,780 tour operators shared total retail travel market revenue of US$6 billion. (Turkey: Market profile, June 2005, p.  344-45).

Turkey has developed itself continuously as a tourist destination over the years. In 2008, the total number of tourists coming to the country was 26.5 million and in 2009 the number grew to 27.3 million. The revenues earned were 22 billion in 2008 and 21.3 billion USD respectively. Turkey was the 7th most visited country in the world according to the figures of 2009. Istanbul has become the third most popular tourist city in Europe after London and Paris. (Tourism, n.d.). This figure is particularly important given the global financial crisis that engulfed the whole world. As a result of the crisis, the global spending on account of travel and tourism decreased all over the world. However, Turkey continued to be viewed as a preferred destination among the tourists of the world. This was a result of the Government support and the improved infrastructure. This is viewed in the financial reports as though the number of tourists increased in 2009, the revenues were lower than in 2008. (Select Property, 30th October, 2008).

 

Among the tourists coming to visit Turkey from the foreign countries there are Turkish citizens as well and they are many in number. The leading Turkish citizens coming to visit Turkey from abroad are the Turkish workers and their families living in Germany and other western countries. They come for family reasons as well as for touristic and holiday purposes. (The Economist Intelligence Unit, 2005, pp. 55-56)

Revenues obtained from tourism increased by 69% between 1998 and 2004. The financial crises in February 2001 created a cheap tourism destination for the foreign visitors with the devaluation of the Turkish lira. Average expenditure per visitor decreased significantly from US$871 in 1998 to US$685 in 2001, but again increased some in 2002-04 to about US$705. The average length of stay for international visitors is low because of the frequent and short visits to Istanbul, especially by Russians. (Turkey: Market profile, June 2005, p. 343).

According to the projections made by the Economist Intelligent Unit international tourism arrivals are expected to be 210,149 million in 2008 which was 13,962 in 2003. Again international tourism departures are also expected to increase to 8,134 million in 2008, up from 5,624 million in 2003 (See Table 3 below).  (Turkey: Market profile, June 2005, p. 341).

 

Table 3: Forecasted International Tourism Arrivals and Departures.

 

To give a better idea, in tables 4, 5 and 6 the number of travel agencies in the country, accommodation facilities licensed by the Ministry of Tourism and foreign tourists and their spending is given for the period after 2000.

 

 

Table 4

NUMBER OF TURKISH TRAVEL AGENCIES BY YEARS

YEARS

NUMBER OF TRAVEL AGENCIES

2002

4472

2003

4495

2004

4493

2005

4478

2006

5165

2007

5184

2008

5672

2009

5751

Source: Tursab, n.d.

 

Table 5

ACCOMMODATION FACILITIES LICENSED BY THE MINISTRY OF TOURISM

YEARS

BEDS

ESTABLISHMENTS

2001

364,779

1980

2003

420,697

2240

 2004

 454,290

 2357

 2005

 483,330

2412

 2006

508,632

2475

 2007

532,262

2514

 2008

 567,470

2566

Source: Tursab, n.d.

 

 

 

 

 

 

 

 

 

 

Table 6

FOREIGN VISITORS FIGURE & TOURIST SPENDINGS BY YEARS

YEARS

NUMBER OF FOREIGN VISITORS

TOURIST SPENDING

ANNUAL

CHANGE %

(x1000)

($ m)

2001

11 569

11

8 090

5,9

2002

13 247

14,5

8 481

4,7

2003

14 030

5,3

9 677

14,1

2004

17 517

24,86

12 125

25,3

2005

21 124

20,60

13 929

14,9

2006

19 820

-6,2

12 554

-9,8

2007

23 341

17,77

13 990

11,4

2008

26 337

12,83

16 761

19,81

 

In 2002 the total number of hotels with operational licenses obtained from the Ministry of Tourism was above 1,700 with a total of more than 315,000 beds. The hotel industry is expanding. Three German-based operators TUI.s Robinson Club Nobilis, Thomas Cook.s Aldiana Sarigerme, and Bentour.s.completed new projects in 2002, and other major international groups Hilton (UK), Ritz-Carlton (US) and Four Seasons (Canada) are also planning expansion in Turkey. Other major international chains, including Intercontinental (UK), Hyatt Regency (US) and Kempinski (Germany), are also active in Turkey (Turkey: Market profile, June 2005, p. 345).

Today the market is also getting more competitive and the customers become more demanding and informed about the service of similar organizations (Hoffman, et al, 1995, p. 49).  In today’s market due to high competition the customers have more choices, and the quality of the service rather that its price is becoming more and more important for the customer hence for the hotels (Kandampully & Suhartanto, 2000, p. 346).  The quality of the services is directly related to the customer loyalty which is the basic need of the hotels for survival.  The hotel service industry in Turkey is a developed one. The hotel industry in the country generally consists of all inclusive resorts and the travellers are offered full relaxation and value for money. One of the major countries that supplied tourists to the country was Israel. However, the Mavi Marmara incident prompted Turkey to react indifferently to the behaviour of the Israeli Government. This in effect has reduced the number of tourists coming to the country as the Government practically boycotted the country as a tourist destination. This has resulted in a huge loss for the tour operators operating in the region. (Freidman, 7th January, 2010). However, the reduction in the number of tourists from Israel has increased the number of tourists from other parts of the world- especially from the Middle East. This proves that the hospitality sector in the country is at par with the world. The relaxation offered and the other benefits given to the travellers act as a spur to invite them to the country. (travel, n.d.).

However, tourism services are increasingly price sensitive.  The introduction of Euro, a new single currency of (EU), are considered to affect those EU member states (e.g. Spain or Portugal) that heavily depend on tourism may become less competitive compared to nearby non-EU destinations like Turkey (Walleghem, 1998, p. 53-55).   The tourism industry on the whole has benefited over the years in Turkey. However, this has invariably meant that the tour operators in the country had operated on lower margins. With the increase in the costs some of the operators went bankrupt. This underlined the fact some of the foreign tour operators came to the country and acquired the home grown operators. One of the biggest and most famous of the operators- Oger Tours was acquired by Thomas Cook. The tour operators stated that the Government did not support them at the time of the crisis. In 2009, only 26-27% of the market was controlled by the Turkish operators. The situation may be in accordance with that of Spain where the whole market of the tour operators is controlled by German companies. This may have a disastrous effect on the economy of the country on the whole. The tour operators like Oger are gradually shifting to the hotel industry which is more profitable. (Basaran, 13th July, 2010)

One of the most important factors of the growth of tourism in the country has been the development of the medical facilities in the country. It has been seen from report that a huge number of people come to the country for their medical treatment. A new concept of “medical tourism” has evolved in the country as a result of this. Many people from both Europe and the US come to the country in search of cheaper medical facilities. This is augmented by the fact that they can experience the beauty and splendor of Turkey. (Medical Tourism in Turkey, 13th March, 2010).  It is predicted that in 2012, the number of tourists coming to the country would be in the region of 33 millions. The major part of the growth would come from the development of the medical tourism. Therefore, it can be predicted that the components of the tourism industry is in for an exciting time ahead. (Bharat Book Bureau, n.d.).

Onura Hotel

The hotel is located at Kusadası region at the Aegean coast of the country and has the following features. It is located on the hillside, sees the beach, and has pools,. It has 301 standard rooms, 6 King suites, 8 Junior suites with private bathrooms, satellite TV sets, mini bar, direct dial telephone, music, air-condition, central heating, hair dryer. There is one open buffet, restaurant, 2 Alacarte Restaurants providing sea foods and International Cuisines, bars with lobby, pool, beach, disco, and roof serving day long. There is 24 hour health service, swimming pools, pool for children, garden, private beach with pier, children playground, kids club, and full day animation. Here is also Turkish bath, massage, sauna, Jacuzzi, laundry, dry cleaning, parking, 24 hour room service, hairdressers and shopping centre, and other services. There are sports services for water sports, fitness centre, table tennis, darts, billiards, mini football, basketball, volleyball, tennis, beach football, aerobic, and gymnastics. Guest can have banquets, meetings seminars and conferences in the 3 meeting halls. The hotel is located 75 km away from the airport of Izmir (Onura Hotel, n.d.). I have conducted interviews with two managers of the hotel and got more detailed information regarding the hotel, its customer profile, competitors, problems and operations which are given below.

The potential competitors of the hotel are the other five star hotels in the region. For, example Fantasia, Korumar, Blue Sky Hotel, Charisma are among those. Hotel’s customer portfolio is generally composed of the tourists coming from Europe, mainly from Belgium, Holland and France. Since the hotel is in the vicinity of Ephesus, Pergamum and Virgin Mary tomb is there. Christian tourists come for religious visits. But in the recent years those coming from Eastern Europe and Greece and Bulgaria are added to this portfolio. As to the domestic tourism market the hotel is cooperating with most of the leading tourism agencies like Jolly Tour. The number of personnel employed by the hotel various according to the season since there is much seasonality regarding hotel operation. The number of personnel employed is 120 between April-May, 150 between June-July, 170 between August-September and 120 between October-November. The hotel is closed during the winter and so employs just 15 personnel. Hotel’s yearly revenues are around 3.150.000 € and expenses are 1.620.000 €. The main problems of the hotel are the difficult to find qualified personnel and high energy prices. The improper zoning and unplanned city buildings creates problem for the tourists. But the Turkish kitchen and food is liked the most (Interview with Onura Hotel Manager, 2011). The study will be aimed at finding the opportunities for the hotel. The hotel has got a good infrastructure and is located at an attractive location in the country. There have been contrasting reviews of the hotel. Some of the contrasting reviews are given here which will help in the progression of the paper:

“My husband and I visited the Onura Hotel on 9 May 2011 for 2 weeks, we arrived at 2.30am were checked in within 10 minutes and the porter took the luggage straight to our room. It was lovely, spotlessly clean wonderful views over the pool and sea. Within 10 minutes of being in our room, a porter arrived with a tray containing filled rolls and plates decorated with tomatoes and gherkins and tea for two, how thoughtful I was very impressed. The following morning we looked over the hotel and grounds and it was super, everything was very clean the pools were great. We went in the dining room for breakfast everything was immaculate, great choice, the staff were wonderful, they cannot do enough for you. I must mention the Animation Team they were out of this world, throughout the day they organised lots of activities, up to you if you want to join in, Lunch was great with a wide choice of dishes, as was the evening meal, super choice of deserts which my husband loved. All the waiters were dressed for dinner in their black/white they were immaculate and so attentive.The evening entertainment was really good and I would recommend The Onura Hotel to anyone in fact we are going back in september for another 2 weeks, many thanks to everyone for an unforgettable holiday.”

“I mean it do not go to this hotel! Yes everyone likes to think ooh 5* at a reasonalble price but it is not worth it believe me. In ignoring the bad reviews me and my friends decided that it couldn’t possibly be that bad, and yes how wrong that frame of mind was. First impressions of the Onura was not that bad the entrance was a bit outdated but seemed alright. However, the hotel staff were ignorant and very rude, no help was given to us what so ever about anything during out “holiday” at this “5*” hotel. The rooms were dirty and old fashioned, the carpets seeped with dust and was covered in cigarette burns. Our balcony ( if thats what you would cal it) consisted of a bloken plastic chair and a railing that was fragile and corroded with rust. It overlooked a concrete jungle and the lower roof of the abismal hotel. I wish i had something positive to say about this hotel but i would only be lieing. In going abroad i expected a fantastic holiday with great accomidation and faccilities. The pool was a sheer let down as it was pea green and did not have any chlorine in it. Remember to forget your goggles on this holiday. When in the pool we came across a giant ball of human hair, i only hope it was from someones head. The sunloungers were broken and dirty and my friend stood on a toenail that was not just a clipping. The food was almost grotesque and deffinetly not fit for any human consumption! I sat in the toilets as i developed a stomach bug on the second day only to hear the noises of others in the same situation.When we got back to Scotland my friend found out she had food poising- the bloody place is a health risk! This hotel was so bad that it was almost funny, if i didnt have good company and free drinks i think i would have cried the entire time. We spent most of our nights out of the hotel and i even dreaded returning. The nightlife is great in Kusadasi but by hell the hotel was hell like actual hell!!!! Do not ignore this review, I’m not some snob trying t put you off I just wouldn’t wish anyone to go through that especially if you look forward to holidays and work damn hard to eventually go on one.” (Atamis Onura Hotel, n.d.).

“The hotel entrance is grand and the loby is huge there is an area to the right as you walk in that is very well furnished with leather sofas and tables and chairs. To the left there is a corridor of shops which includes a hand bag shop a photography shop a hair dressers a jelwery shop and a market shop( bit like a local spar really) very well equipped. The staff on reception were helpfull and friendly and gave good directions to the rooms.” (Atamis Onura Hotel, n.d.)

The reviews provided here are inconclusive in nature. Some of the reviews of the customers praise the infrastructure of the hotel as well as the services. However, there are some negative reviews from the customers of the hotels. This is not desirable for a hotel of the stature of the Onura. It proves that the functions and operations of the hotel is not developed enough to take care of the customers.

The main responsibility of the management of the hotel would be therefore to improve the operations of the hotel. After the operations of the hotel are developed, it will attain the standards to cater to the high class customers. Another point that has come out from this review has been the lack of marketing activities of the hotel in the field of international tourism industry. Therefore, the management has to make sure that up to date marketing and promotional facilities are adopted.

As the reviews of the customers are inconclusive in nature, the next objective of the paper would be to perform a primary research on the employees of the hotel as well as some randomly selected customers. As they are the most important parts of the family of the Onura Hotel responses of them will be able to form a conclusive conclusion to the study.

References:

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Chu, E. (April, 2010). CHALLENGING 2009 FOLLOWED BY OPTIMISM FOR INTERNATIONAL TOURISM IN 2010. Intervistas. Available at: http://docs.google.com/viewer?a=v&q=cache:c2Xc1zaPXLMJ:www.intervistas.com/downloads/CAIR/articles/04_apr2010_b.pdf+global+tourism+after+recession&hl=en&gl=in&pid=bl&srcid=ADGEESipDCDReqz1Jqem96i891IUYmCFmWotvWBgvgHkp6cpT_plBmcBoT7TVez7HklkQj18TovK7zeGe3c9AwdUXBM_JijdFQYATqcJbwgO0MVuFYltIgWq8Db9kKWF22nFWC0oOcsY&sig=AHIEtbRtjvNOacAVxvJ7KC47SqcKTCYi3Q (Accessed on 5th July, 2011).

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Corporate Property

July 20, 2011

Abstract

According to the property law, a property’s security interest can either be equitable or legal. Corporate charges are however considered to be subjected to another category or classification that can be fixed (equitable or legal) or floating which means being equitable only. Floating charge is a security that is known to have been developed back in the mid nineteenth century. It is during this century that the corporate charges were introduced by the statute into Scotland as a way through which a firm or a company could develop a charge over an asset class or type relatively to a particular specified asset. Let us take an example of a manufacturing company that makes a large amount of objects in just a short period of time like say a day and it becomes impossible to establish a fixed charge on every item but it becomes possible to associate every object as branch of the corporate asset class. In such a case, the floating charge value is that it has the ability to attach itself to a class that is said to be nominated relative to the class’ individual assets. Some of the classes in this case are production goods, assets, machinery, book debts, just to mention but a few. It should be noted that floating charges can neither be created by individuals nor partnerships.

This paper seeks to highlight a discussion on corporate property focusing on Lord Scott of Foscote In re Spectrum Plus Ltd (in liquidation) [2005] 2 A.C. 680 at [97] and the decision made in the Spectrum in having curtailed “freedom of contract” within courts when novel dispositions have been made through commercial contracts.

The Spectrum and the House of Lords

Following the appeal made on National Westminster Bank PLC -v-Spectrum Plus Limited, 30th June 2005 marked the day in which the House of Lords forwarded its judgment[1]. Before the Law Lords, the main issue was whether a future or present book debts charge would be paid into the current account of Chargor with the bank being a floating charge or rather being a fixed charge. After discussing for some period of time, the House of Lords came to a conclusion that book debt charge was to be considered as a floating charge. As a result, all preferential creditors got a priority over the floating charge of the bank in the Spectrum liquidation. The decision that was made by the House of Lords in making the charge floating led to a reverse of the court’s appealing decision in the last year’s case[2]. Also, it resulted to an overrule to Siebe Gorman -v- Barclays Bank case that took place in 1979 and which until this day was considered being a legal influence in the creation of fixed charges above book debts. The decision that was made by the House of Lords widely limited fixed charges creation scope over that of book debts and thus creating significant repercussions for banks in their lending methods and policies used by lenders to acquire security from different borrowers.

According to the Spectrum, Spectrum Plus Limited which was a borrower was a chemical and dye manufacturer for the industry of paints[3]. 1997 was the year with which Spectrum opened an account with the bank of National Westminster. Spectrum obtained about two hundred and fifty thousand pounds as overdraft facility from the bank. Spectrum was forced to grant the bank a debenture that consisted of fixed charge over book debts that was act as its indebtedness security to the bank. Spectrum was restricted and limited to its ability of dealing with book debts with reference to the charge terms. It stated as follows [4]. With reference to the book debts and other debts hereby specifically charged [Spectrum] shall pay into [Spectrum’s] account with the Bank all moneys which it may receive in respect of such debts and shall not without the prior consent in writing of the Bank sell factor discount or otherwise charge or assign the same favour of any other person or purport to do so and [Spectrum] shall if called upon to do so by the Bank from time to time execute legal assignments of such book debts and other debts to the Bank”[5]. The debt belonging to the Spectrum was to be paid back using the current account opened for Spectrum by the bank. This was to be done with the condition that the overdraft was not to exceed the established amount. During the period that spectrum had an account, it was free to deposit and draw on their account for the purpose of business functionality[6]. A question might arise on whether Spectrum either grants a floating or fixed charge.

An agreement made by the Law of Lords was that in other occasions there were situations in which fixed charge were settled on book debts. In order to determine the nature of the charge as floating or fixed, the names that appear did not matter but rather the effect the charge brought was used to determine the type of charge in such a case. From the Lords point of view, one characteristic that they used to define a floating charge was “the asset subject to the charge is not finally appropriated as a security for the payment of the debt until the occurrence of some future event[7]. In the meantime the chargor is left free to use the charged asset and to remove it from the security”. A question that remained to be asked considering that the book debts proceeds for Spectrum’s bank’s current account were paid was “was the account one which allowed the company to continue to use the proceeds of the book debts as a source of its cash flow or was it one which, on the contrary, preserved the proceeds intact for the benefit of the bank’s security? Was it, putting the point shortly, a blocked account?”[8]

From this, the Lords considered Spectrum free of using the proceeds that were paid into their current account as their cash flow source. The bank in this case couldn’t block them from accessing the account and realized that their security over book debts that was transferred in the account before the event of crystallization under charge had already taken place[9]. The Law Lords decided to refer to the charge as floating and not fixed since their account could be accessed easily thus preserving the proceeds as bank security9. Siebe Gorman is another case that was relied upon for about twenty five years by lenders. Overruling of this case meant that fixed charges would no longer be put on those book debts that were paid directly into the account and the borrower continues to use the account as the supply of cash flow10. According to the Law Lords, only fur situation determine on whether a fixed charge can be established on book debts.

The first one is by making sure that the book debts are assigned to a lender and that the assignment notice is given to the debtor of the borrower[10]. The second situation is when the borrower is required to pay the book debt proceeds to the lender in order to reduce the outstanding debt of the borrower9. The third situation that can make a fixed charge to be established on book debts is when a borrower is required to pay book debt proceeds with the lender in the blocked account[11]. Lastly, is when the borrower is expected to pay proceeds into another account using a bank of third party in which the lender in this case possesses a fixed charge[12].

In short, results obtained by Spectrum suggest that for one to have a fixed charge, the lender should ensure that the borrower is prevented from using book debt proceeds that are paid to the bank account[13]. Unavoidably will there be conflicts between the banks needs and the business needs. In order for other lenders to secure the facilities of their customers, they rely on Siebe Gorman charges more than book debts. The need for reviewing such scenarios is that additional security might be required by the borrowers which will provide the lender with effective protection12. This applies in the circumstances whereby book debts proceeds are required to have the business afloat for the borrower. What is more is that 2002 enterprise Act has significantly reduced the protection offered by charge that were created earlier on. “Spectrum” states clearly that lenders should reevaluate the type of security needed and how to constitute upon it[14].

Fixed charges, Book debts and Floating charges

A fixed charge is defined as a type of security interest that is usually given to a lender by a given company in order to secure a loan repayment. Usually, Chargor is the term given to refer to the company offering the charge while Chargee is the term used to refer to the individual in favor of the charge[15]. A security is referred to as when a chargee has floating charge over stock in trade and cash and also when a charge has equitable charge over non trading assets of any kind that belong so to the chargor. A charge that is fixed   can either be equitable or legal over particulars of a company’s identifiable assets. A good example of a fixed charge is a company mortgage. Usually, a fixed charge is used to prevent charge assets being dealt with without the charge holder’s consent which is an inappropriate type of security that experiences constant change[16].

The distinction that exists between floating and fixed charge is that they both raise a continuous uncertainty concerning the nature of all floating charges[17]. On other circumstances, a floating charge can be regarded as a charge that does not establish equitable or proprietary interest on ant type of particular assets until its crystallization. An advantage found on the floating charge is that a company can easily deal with any type of assets and it is only restricted on the circumstances that the charge is identified as floating, fixed charges having drawbacks from the charge point of view16. Lately, the courts have approved a pragmatic approach used for charges effect and are disposed to provide its effects according to the party’s wishes noticeable in the contract of the security unless alternatively provided by the law. For a charge to be treated as floating or fixed, the law decides to use a pragmatic approach in an effort of giving effects to wishes established by the parties bearing in mind that it is not incompatible with the charge wording[18].

A recognizable restriction example that appears not incompatible with those charges that are identified as float is the agreement established by the chargor promising not to develop any succeeding security on assets that are charged[19]. This would be used to rank equally or before together with the floating charge[20]. Floating charges are always unquestionable whenever pledge covenants are negative in nature. The duties and rights as categorized by the law as floating charge are acquired from the parties’ agreements supplemented by those law terms that are always applied.

Fixed charge on book debts

With relation to the Spectrum, the House of Lords unanimously apprehended that the debenture belonging to the bank established a floating which is an opposition to the fixed charge over the book debts. The significant decision that took a lot of time for the House of Lords o make had a considerable importance on the financing and banking industry[21]. For this reason, it is always advisable for lenders to be cautious whenever debentures are being considered as security[22]. The company of Spectrum Plus Limited had got hold of National Westminster Bank Plc’s overdraft facility and funded NatWest with a debenture that would be sued to secure all the amount of money due to NatWest from the company[23]. Particularly, the debenture was articulated to develop a specified type of charge referred to as fixed over book debts. The company was in no position of disposing or encumbering the book debts that appeared as uncollected book debts. Rather, the only option that was remaining was to collect debts from its debtors. Once all the debts were collected, the company was expected by the debenture to pay back into the account the proceeds of the book debt[24].

According to the case of Siebe Gorman, the charge that was over book debts was identified as fixed. In the current case that was established following the company’s liquidation, an assertion made by NatWest was that fixed charge was the charge encountered over book debts and that it demanded book debt payment proceeds from its liquidators[25]. This idea was not the same as that of the State Secretary for Trade and Industry, Excise and Customs Commissioners and the Inland Revenue Commissioners who asserted that the charge over book debts was a float charge and that all proceeds had to be availed in order to compensate preferential creditors, following the appeal made by NatWest, Siebe Gorman made up its decision and decided to rule in support of NatWest[26]. The judgment made stood on the grounds that the charge over book debts was fixed rather than float. An appeal made by the Crown Creditors to House of Lords in October 2004 was handed back by the court in June 2005. The issue in this case was to determine on whether the present charge over book debts which was offered to NatWest under debenture by the company was fixed or float. Finally, a conclusion was made by the House of Lords that the charge over book debts was fixed which merely a floating charge was26.

Freedom of Contract

A contract is defined as an agreement that is legally enforceable between different parties that come together with a mutual obligation. It should be noted that common laws maintain high level standards of contract freedom in which parties are at a liberty of setting terms of their own25. This feature should be considered by parties involved since it is a bright way of drafting that can take both parties to higher levels[27]. According to the Spectrum and Siebe Gorman, the bank and the company involved must make sure that they focus on creating a charge that is fixed in nature. This makes the parties involved to be recognized with conceptual difficulties that create a fixed charge that should address these problems in particular. Nevertheless, the parties intentions and the skills applied by the draftsmen does not ultimately count for anything but rather considerations made by the court were on what the charge was all about and not wishes made by the parties[28].

Security systems that focus on the freedom of contract states clearly that ingenuity is unavoidable on all those developing security documentation to be tested during the contract period in the court room. From Hoffman’s perspective of thought, floating charges can be defined exhaustively and that enumerating standard characteristics is what is required[29]. This type of charge does not necessarily operate on the reasoning that the absence or presence of one or more of its features makes the charge not to be identified as a float. There are penumbral cases that are bound and this makes it difficult to determine on whether the deviation degree from the case of standards make it not fit to hold such a term[30].

Novel disposition-1925 Act

In the Property Law Act of 1925 (a) Section 53(1)c, it states that “A disposition of an equitable interest or trust subsisting at the time of disposition must be in writing signed by the person disposing of the same or by his agent thereunto lawfully authorized in writing or by his will”. The question to be asked in such a case is whether the part involved enjoys the present equitable interest. Considering the party to be M, then the party involved has to substitute an equitable interest which is formed under trust28. Part 53(1)(c of the act talks about the existence of personality interest leaving an answer that the same section of LPA 1925 has its definition referring to equitable contexts of land interests. Basically, Act 1925 of the Law of Property can be defined to refer to land equitable interests[31]. In spite of its definition, the effectiveness of the court’s decisions together with that of the House of Lords with relation to section 53(1)(c) of the Property Law Act 1925, it is evident that it is composed of both personality and reality.

This act states that a person’s interest in terms of land occupation or rent/profit receipt always seem to be overriding. This is so unless the right holder makes the enquiries and at the same time, the rights should not be disclosed. One feature about the act is that it does not give a distinction of the interests overriding the land registration and those that seem to override the dispositions that are subsequently registered[32]. From section 70(1)(g), one can easily tell that potential problems can be created for land estate purchasers. This makes its laws to be enforced to the point of being enforced to every participant.

The parties involved in this case are those that owned the land originally and those that become later purchasers of the land. Later the 2002 Act was established purposing to reduce the overriding scope as defined in the 1925 Act specifically section 70(1)(g)[33]. In this act, a person’s rights in rent receipts as well as profits became no more overriding their rights and those of people in actual occupation which are likely not to override the registered disposition. Effects created by the overriding of interests in the first registration did not experience any changes. Overriding status changes of the rights of occupiers do not appear extensive as originally proposed by the Law Commission[34]. This in turn might provide an increased protection to occupiers’ rights interests that should never be disclosed. On the other hand, it is on balance in that the purchaser will experience favor following the changes made over occupier’s rights.

Spectrum and Commercial Contract as they have Freedom of Contract

Introducing the rule of disposition has resulted to the elimination of the freedom rule within the Spectrum and Commercial contract. This is because both commercial and spectrum contracts have introduced what they refer to as a freedom of contract. This has made this law to be on the disposition side rather than freedom. The common law is one of the reasons as to why freedom of law is required in order to maintain such high levels of jurisdictions within the common law[35]. The feature of freedom of contract allows parties involved to establish the terms with which they want to be adhered to. The civil law is however on the contrary of what the freedom of contract requires. In the case of the civil law, it applies particular overarching standards to the arising disputes that are out of the contract. A good example is the Civil Code applied for the French[36].

Different law systems allow parties involved to have the freedom to choose on whether they intend to get into a contract. In most real property transactions, the law specifies that there should be compilation of some contracts which are supposed to be under a specified legislation which in some cases is referred to as statute of frauds36. According to the stated law of the Spectrum, it is always necessary to trace the assets of disposition following the corporate law of the state to find out the location of the proprietor.

 

 

 

References

  1. ACCA. (2010). Fixed Charges on Book Debts. Retrieved From http://www2.accaglobal.com/archive/inpractice/63/1112127
  2. Atiyah, P.S.. (1979).The Rise and Fall of Freedom of Contract. Clarendon Press.
  3. Barnett, Randy (2003). Contracts. Aspen Publishers.
  4. Cheneval, Francis. (2006). Realizing Property Rights. Ruffer & Rub.
  5. Clarke, Paul A. B.; Linzey, Andrew. (1996). Dictionary of Ethics, Theology and Society. London: Routledge. Kettl, Don (November 2006). “Public Bureaucracies”. The Oxford Handbook of Political Institutions edited by R. A. W. Rhodes, Sarah A. Binder and Bert A. Rockman. Oxford University Press.
  6. Commencing with the decision of Slade J in Siebe Gorman v Barclays Bank [1979] 2 Lloyd’s Rep 142
  7. Dworkin, Ronald (1986). Law’s Empire. Harvard University Press.
  8. Ellickson, Robert. (1993)  “Property in Land”, Yale Law Journal 102: 1315-1400.
  9. Finn, John E. (1991). “Constitutional Dissolution in the Weimar Republic”. Constitutions in Crisis: Political Violence and the Rule of Law. Oxford University Press.
  10. Fixed versus floating Charges. (1998). Appleby. Retrieved from http://www.applebyglobal.com/uploaded/Publication/651_File_5.pdf
  11. Glenn, H. Patrick (2000). Legal Traditions of the World. Oxford University Press.
  12. 12.              Goldhaber, European Court of Human Rights,
  13. Goode, R. (2003).  Legal Problems of Credit and Security, 3rd edn.
  14. Goode, Roy (2006).  Company Charges – Spectrum and Beyond.  writing in Getzler & Payne.
  15. Goode, Roy. (2000). Commercial Law, 2nd ed., at page 731
  16. Gordley, James R.; von Mehren, Arthur Taylor (2006). An Introduction to the Comparative Study of Private Law. Cambridge: Cambridge University Press.
  17. Gough, W. (1996).  Company Charges. 2nd edn
  18. Hamilton, Michael S., and George W. Spiro (2008). The Dynamics of Law, 4th ed. Armonk, NY: M.E. Sharpe, Inc.
  19. Hart, H.L.A. (1961). The Concept of Law. Oxford University Press.
  20. Hatzis, Aristides N. (November 2002). “The Nature of the Firm”. European Journal of Law and Economics 14 (3): 253–263.
  21. Hayek, Friedrich. (1978). The Constitution of Liberty. University Of Chicago Press.
  22. Hazard, Geoffrey C.; Dondi, Angelo (2004). Legal Ethics. Stanford University Press.
  23.  Hernando De Soto (1989). The Other Path. Harper & Row.
  24. Hoffmann, Lord. (1986). Re Bright life [1986] 3 All ER 673 at 678.
  25. House of Lords Judgments. (1992). House of Lords
  26. House of Lords Reform.  (2006). Retrieved from http://lawiki.org/index.php?title=House_of_Lords_reform.
  27. Insolvency Act 1986, s 29(2).
  28. Jakobs, Lesley A. (2004). “Retrieving Equality of Opportunity”. Pursuing Equal Opportunities. Cambridge University Press.
  29. Lingard, Bank Security Documents, 3rd ed. at para 9.19
  30. Luban, David (2001). “Law’s Blindfold”. Conflict of Interest in the Professions. Oxford University Press. Malloy, Robin Paul (1994). “Adam Smith and the Modern Discourse of Law and Economics”. In Paul Malloy, Robin; Evensky, Jerry. Adam Smith and the Philosophy of Law and Economics. Springer
  31. Mattei, Ugo (1997). “The Distinction between Common Law and Civil Law”. Comparative Law and Economics. University of Michigan Press.
  32. Matthews, Paul (Autumn 1995). “The Man of Property”. Medical Law Review,
  33. McGhee, John (2000). Snell’s Equity. London: Sweet and Maxwell
  34. Mckay, John P. (2004). A History of World Societies. Boston: Houghton Mifflin Company
  35. McKendrick, Ewan. (2005). Contract Law – Text, Cases and Materials. Oxford University Press
  36. Nolan, R. (2004). Property in a Fund 120 LQR 108.
  37. Ober, Josiah (1996). “The Nature of Athenian Democracy”. The Athenian Revolution: Essays on Ancient Greek Democracy and Political Theory. Princeton University Press.
  38. Olivelle, Patrick (2005). Manu’s Code of Law: A Critical Edition and Translation of the Manava-Dharmasastra. New York: Oxford
  39. Olson, David M., Norton, Philip (1996). “Legislatures in Democratic Transition”. The New Parliaments of Central and Eastern Europe. Frank Cass (UK).
  40. Papachristou, T.K. (1999). “The Sociological Approach of Law”. Sociology of Law. Athens: A.N. Sakkoulas Publishers.
  41. Pelczynski, A.Z. (1984). The State and Civil Society. Cambridge University Press.
  42. Petersmann, Ernst-Ulrich (1997). “Rule of Law and Constitutionalism”. The GATT/WTO Dispute Settlement System. Martinus Nijhoff Publishers.
  43. Rabagliati, David. (2007). The Fixed Charge on Book Debts Floats Away – The House of Lords Overrules Siebe Gorman -v- Barclays Bank. Retrieved from http://www.middletonpotts.co.uk/index.php?option=com_content&view=article&id=262:-the-fixed charge-on-book-debts-floats-away-the-house-of-lords-overrules-siebe-gorman-v-barclays-bank&catid=7:corporate-a-commercial&Itemid=67.
  44. Raz, Joseph (1979). The Authority of Law, Essays on Law and Morality. Oxford University Press.
  45. Redfem, Alan. (2004). “Regulation of International Arbitration”. Law and Practice of International Commercial Arbitration. Sweet & Maxwell.
  46. Rheinstein, M. (1954). Max Weber on Law and Economy in Society. Harvard University Press.
  47. Pipes, Richard. (1999). Property and Freedom.
  48. Schermers, Henry G.; Blokker, Niels M. (1995). “Supervision and Sanctions”. International Institutional Law. The Hague/London/Boston: Martinus Nijhoff Publisher.
  49. Sealy, L.S.; Hooley, R.J.A. (2003). Commercial Law. LexisNexis Butterworths.
  50. Smith, Stephen A. (winter 2003). “The Structure of Unjust Enrichment Law: Is Restitution a Right or a Remedy” (PDF). Loyola of Los Angeles Law Review 36 (2): 1037–1062. Retrieved 2007-02-09.
  51.  Bethel, Tom. (1998). The Noblest Triumph: Property and Prosperity through the Ages. New York: St. Martin’s Press.
  52. Blackstone, William. (1995). Commentaries on the Laws of England, 4 vols. Oxford Univ. Press.
  53. World Intellectual Property Organization (1997). The System of Intellectual Property: Introduction to Intellectual Property. Kluwer Law International.


[1] Redfem, Alan. (2004). “Regulation of International Arbitration”. Law and Practice of International Commercial Arbitration. Sweet & Maxwell.

 

[2] Atiyah, P.S.. (1979).The Rise and Fall of Freedom of Contract. Clarendon Press.

[3] Cheneval, Francis. (2006). Realizing Property Rights. Ruffer & Rub.

 

[4] Dworkin, Ronald (1986). Law’s Empire. Harvard University Press.

 

[5] Ellickson, Robert. (1993)  “Property in Land”, Yale Law Journal 102: 1315-1400.

[6] Mckay, John P. (2004). A History of World Societies. Boston: Houghton Mifflin Company

[7] McKendrick, Ewan. (2005). Contract Law – Text, Cases and Materials. Oxford University Press

 

[8] Nolan, R. (2004). Property in a Fund 120 LQR 108.

[9] Olivelle, Patrick (2005). Manu’s Code of Law: A Critical Edition and Translation of the Manava-Dharmasastra. New York: Oxford

[10] Redfem, Alan. (2004). “Regulation of International Arbitration”. Law and Practice of International Commercial Arbitration. Sweet & Maxwell.

[11] Schermers, Henry G.; Blokker, Niels M. (1995). “Supervision and Sanctions”. International Institutional Law. The Hague/London/Boston: Martinus Nijhoff Publisher.

 

[12] World Intellectual Property Organization (1997). The System of Intellectual Property: Introduction to Intellectual Property. Kluwer Law International.

[13] Bethel, Tom. (1998). The Noblest Triumph: Property and Prosperity through the Ages. New York: St. Martin’s Press.

[14] Sealy, L.S.; Hooley, R.J.A. (2003). Commercial Law. LexisNexis Butterworths.

[15] Hatzis, Aristides N. (November 2002). “The Nature of the Firm”. European Journal of Law and Economics 14 (3): 253–263.

 

[16] House of Lords Judgments. (1992). House of Lords

[17] Gough, W. (1996).  Company Charges. 2nd edn

[18] Hart, H.L.A. (1961). The Concept of Law. Oxford University Press.

[19] Hayek, Friedrich. (1978). The Constitution of Liberty. University Of Chicago Press.

[20] Insolvency Act 1986, s 29(2).

[21] Hernando De Soto (1989). The Other Path. Harper & Row

[22] Hoffmann, Lord. (1986). Re Bright life [1986] 3 All ER 673 at 678.

[23] House of Lords Judgments. (1992). House of Lords

[24] Jakobs, Lesley A. (2004). “Retrieving Equality of Opportunity”. Pursuing Equal Opportunities. Cambridge University Press.

 

[25] Mattei, Ugo (1997). “The Distinction between Common Law and Civil Law”. Comparative Law and Economics. University of Michigan Press.

[26] Lingard, Bank Security Documents, 3rd ed. at para 9.19

[27] Mckay, John P. (2004). A History of World Societies. Boston: Houghton Mifflin Company

 

[28] Papachristou, T.K. (1999). “The Sociological Approach of Law”. Sociology of Law. Athens: A.N. Sakkoulas Publishers.

[29] Sealy, L.S.; Hooley, R.J.A. (2003). Commercial Law. LexisNexis Butterworths.

[30] Pipes, Richard. (1999). Property and Freedom

[31] Raz, Joseph (1979). The Authority of Law, Essays on Law and Morality. Oxford University Press.

[32] Rheinstein, M. (1954). Max Weber on Law and Economy in Society. Harvard University Press.

[33] Goldhaber, European Court of Human Rights

[34] Goode, Roy (2006).  Company Charges – Spectrum and Beyond.  writing in Getzler & Payne.

 

[35] Goode, R. (2003).  Legal Problems of Credit and Security, 3rd edn.

[36] Nolan, R. (2004). Property in a Fund 120 LQR 108.

 

Discussion Questions

July 20, 2011

Your Name                                                                                                               Course

Professor                                                                                                                   June 27, 2011
Discussion Questions

Susan Glaspell’s ‘A Jury of Her Peers’

            Analyzing the reason behind Mrs. Hale and Mrs. Peters response in the story, it can be seen that their viewpoints and failure to consider the facts of the story demonstrate their connection and empathy to the accused in the story. In particular, it showcases the clash between sexes as men and women continue to influence the manner that people define and consider the realities that are happening. At the same time, it also aims to define the subjectivity on how people view the realities of life. From the perspective of Mrs. Hale and Mrs. Peters, they mainly rely on their emotions as tools to define reality. On the other hand, men try to ascertain the truth and validity of information by providing concrete evidences to support the matter. Seeing this, Glaspell’s story aims to show that such conflict and the inability of women to have a voice concerning this issue paved the way for Mrs. Hale and Mrs. Peters to challenge the law and show empathy to Mrs. Wright’s situation even if it would mean tampering with the truth.

Response to Craig’s Work

            Considering the response of Craig’s work, its strength is its ability to connect the value of subjectivity in interpretation in the manner that characters of the story respond to the situation. What is essential about Craig’s post is his realization of how these areas remain to be connected by the ability of characters to understand the information given to them. Even if there are existing differences in the manner that men and women respond to information given to them, the truth remains to be seen that varying examples allow both parties to view the realities happening around them.

Katherine Mansfield’s ‘Miss Brill’

(2)       My initial reaction upon reading the story was that Miss Brill remains to be a deranged woman. Here, she tries to depict a reality that is cultivated by her imagination. It also demonstrates how she uses these elements to dictate her life and pattern responses in accordance to this situation. At the same time, I also felt that the main character’s response to both the setting and other character’s in the story remains to be detached. Even if she tries to connect with each one, the false reality that Miss Brill has created prevents her from doing so as she continues to cling to what happened in the past.

(4)       Analyzing Mansfield’s definition of the setting at the beginning of the story, it can be argued that its usefulness corresponds to the ability of readers to immediately determine the issue and environment that Miss Brill lives in. It demonstrates the use of different symbolisms such as the ‘fur hat’ as manifestations of a past life that was happy and carries along positive experiences. As other characters become introduced, the mood of the main character changes as it demonstrates the transition of feelings from a lively attitude to a more lonely and detached response.

Response to Craig’s Work

Analyzing Craig’s response in question number 2, he provides a good justification and initial response to the story. In particular, he tries to present his viewpoint concerning the matter and tries to justify these by providing specific examples to back up his claim. At the same time, Craig was also able to recognize how his opinions created ways to connect with what Mansfield is really portraying in the story.

On the other hand, Craig’s response in question number 4 provides a deep interpretation about the connection and relevance of the setting as it depicts how Miss Brill responds to the story. By providing this analysis, Craig was able to show how the setting paved the way for characters to behave and what symbols and tools Mansfield uses in order to portray these connections to readers of the piece.

Alice Walker’s ‘Everyday Use’

Upon reading Alice Walker’s selection entitled ‘Everyday Use’, one thing that is relevant about this article is its capacity to provide useful insights concerning the application of culture and heritage. What I like about the selection is its ability to provide simple ways to differentiate and define how identity is constructed among the characters in the story. In particular, this was exhibited by Dee and Maggie in the story. Even if they continue to exhibit differences in terms of attitude and behavior, they still continue to show similarities particularly in addressing and connecting with one another. Likewise, their experiences also seek to demonstrate the relevance and essence of their heritage. This can clearly be seen in the manner that they respond to the issues happening in their lives. From here, Walker was able to depict the relevance of heritage and customs by the ability of characters to interact with one another and examine opportunities that can influence and shape the choices that they make in their life both today and in the future. Such can be seen in the quote “It was Grandma Dee and Big Dee who taught her how to quilt herself. She stood there with her scarred hands hidden in the folds of her skirt”. In addition, the differences of the two characters also show how ties remain to be strong despite the changes of time that is happening. It may be true that new customs and norms have reshaped the manner people live and understand reality. However, having a deep connection with one’s personal values is one way to understand the dynamics of relationship and identifies how it transcends with changes happening today. This can be seen with the quote “I did something I never done before: hugged Maggie to me, then dragged her on into the room, snatched the quilts out of Miss Wangero’s hands and dumped them into Maggie’s lap” Overall, the piece remains to be a valuable tool not only because it caters to the use of symbolisms that depicts the manner that siblings relate to with one another but also create a new way to determine the relationship and link between culture and determination of heritage.

Work Cited

Roberts, Edgar. Literature: An Introduction to Reading and Writing. 10th  Ed. 2012 US:

Longman.

Britvic

July 12, 2011

 

Abstract

This essay is a brief case study of Britvic brand. It explains the core, actual and augmented products of the brand and also discusses the source of brand equity and recommended market targets for the brand.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Britvic

Introduction

Britvic is a softdrink company located in the United Kingdom. Although it operates mostly in the UK and Ireland, it exports software drinks to more than 50 countries.

Core, actual and augmented products of Britvic

Britvic has six Core GB brands: Pepsi, Fruit shoot, J2O, Tango, Robinson squash and 7UP. Pepsi has been rated the number one cola in licensed on-premium. Robinson squash consolidates its number one position with volume and value share gain in the squash market. The company allocates greater resources to these brands as compared to other brands (Scantrak, 2009).

Britvic’s augmented products include 7UP and Pepsi in UK and Ireland, and Mountain Dew Energy and Gatorade in Great Britain.

Actual products include all the other products that the company produces. They include cordial drinks like Robinson and Miwadi. Water drinks include Pennine Spring and Ballygowan. Majority of the drinks are softdrinks, and they include Tango, Club, Purdeys, Red Devil Energy Drink, Shardy Bass, Britvic 55, Really Wild Drinks Company, Idris Ginger Beer, R, White Lemonade, TK Lemonade C&C Lemonade and Cldona (Scantrak, 2009).

Sources of brand equity for any given Britvic brand

Britvic has built a strong-brand equity over time. This has resulted from its efforts which have been regularly occurring to maintain the strong-brand equity. Frequent production of new brands has contributed to popularizing the brand. In 2008, the company launched Gatorade drink and in 2010, Britvic launched Mountain Dew Energy. Both were launched in the UK. In addition, the new brands are equal in quality with American softdrinks but have high caffeine content and more sugar. In addition, the company is making plans to expand its business further in Europe (Scantrak, 2009).

Another source of brand equity is the rampancy of the brand. The brand is very popular in UK, Ireland and 50 more countries. This indicates that the drink has received global acceptance. This fact is vital in projecting quality among consumers. In fact, the company is the largest supplier of branded still drinks in Great Britain and stands at the second position in supplying branded carbonated. The company has created business links with popular commercial partners like PepsiCo which has helped in growing the company. There is mutual benefit (Scantrak, 2009).

The company has invested in advertising and publicizing its brand. It has had strong execution of Pepsi under the slogan “Max It for a Million” and “Comes with music.” This has contributed create a strong-brand equity. Recently, consumer prevalence for Tango has increased by 8% points following the Save Tango campaign.

The company is also dedicated to innovation of its seed branches in drench, Pepsi raw, Gatorade, Lipton ice and V water. The company has made efforts to ensure favorable prices. In the Britvic article, the company experiences good response from the juicy drench and Robinson launch. These two were meant to boost the company’s average realized costs. The company is very keen in observing market mix and therefore, has become very popular (Scantrak, 2009).

To maintain strong-brand equity, the company is committed to supporting and growing core brands, innovating and development of new products, improved management efficiency through improved margins and free cash flow. In addition, the company has laid strategies to invest in Britvic Ireland and expand its trade in Europe (Scantrak, 2009.
Recommended target market for Britvic brand

The company should focus on African countries. This is because the company has not ventured in these countries before. Also, there is less competition considering the fact that only a few western brands are being marketed in the African market.

Conclusion

Britvic has a strong potential and can achieve its goals if the necessary laid out expansion strategies are successful. The company has shown good progress in the past and, therefore, its future is guaranteed.

 

 

 

 

 

 

 

 

Reference

 Scantrak, N. (2009). Britvic annual report. Available May 30, 2011, from

http://www.britvic.com/~/media/Files/Media%20Centre/Reports/Britvic_Annual_2009.ashx