My apologies for the lack of posts over the past two days. I was attending the Wealth Pro conference in Riga learning about tax domiciles, corporate structures, etc…
Glad to be back at the office.
I was recently talking with a client over Skype, who made the point that changes in sentiment can have a drastic effect on the price of securities. He was absolutely right.
However, there is ‘sentiment’ and then there’s ‘non-sense’.
Here’s a recent example:
The Morgan Stanley Emerging Markets Domestic Debt Fund (EDD) invests in a portfolio of emerging market bonds that were issued in their local currency. Like regular mutual funds, the value of the holdings of a closed-end fund are calculated on a daily basis resulting in a net asset value (NAV). However, whereas the daily price of a mutual fund unit is based on its NAV, closed end funds are traded on the open market and are thus priced at whatever price the market bears. Usually, discounts to NAV in equity ETFs can be arbitraged away through high-frequency trading price arbitrage. However, this pricing efficiency is harder to replicate in the over-the-counter bond market – especially when dealing with more exotic bonds. Put simply, it is hard to replicate the holdings of EDD, so EDD has historically traded at a discount of its NAV. There is a functional logic to this fact. However, the degree of the discount to NAV can be quite striking.