Berkshire Hathaway 2006 Annual Meeting Audience Question # 4

Historically, close end funds have “overwhelmingly” gone to discounts

Warren Buffett:

OK. Number 4?

Audience Member:

My name is Yuen Gunn, and I’m from Whitehaven in England.

Actually, the last time I was this nervous asking a question, I’d just presented my wife with an engagement ring from Borsheims.

Warren Buffett:

Well, I hope you get nervous again.

Audience Member:

My question for you is, with the enthusiasm at the moment for emerging markets, many closed-end funds which contain emerging market stocks are trading at significant premiums to their net asset values, even when open-ended funds can be used to acquire similar portfolios of stocks for the net asset values.

This doesn’t seem very rational to me. Why do these premiums persist, and do you agree that it’s irrational?

Warren Buffett:

Yeah. I would say it would tend to be. I don’t know anything about the specifics that you’re referring to on emerging market funds. I haven’t looked at the size of the premiums.

But, history would certainly show that most closed-end funds… just about all closed-end funds… eventually go to discounts.

I actually worked… well, I’ll skip that analogy. But the… overwhelmingly, closed-end funds have gone to discounts.

You know, initially, if they’re sold with a 6 percent commission, of course, the initial people are getting 94 cents of net asset value by paying the dollar, but I know I… if I saw two… if I had an interest in buying into emerging markets through other people’s management and I could buy an open-end fund at X, or an asset value, and I had to pay 120 percent of X for some closed-end fund, you’d have to convince me very strongly that the management of the closed-end fund was better.

So I think you’re right. I don’t… again, I don’t know the… if the premium is a few percent, it doesn’t really make much difference.

But occasionally, Charlie and I have witnessed in the past closed-end funds that have sold even at 30 or 40 percent premiums over asset value.

Overseas Securities was a tiny fund that used to do that for years and baffled everybody. But eventually they will come back down to earth.

Charlie?

Charlie Munger:

I’ve got nothing to add.

Warren Buffett:

He’s hitting his stride now.

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