RE:RE:GLTALongs. Burn the shorts. 9:46AM ET on Monday Dec 20,I don't recall the details of ENS, but I can describe the general structure of a split fund.
(1) Preferred shares and common shares are issued in pairs. You do not need to own both sides of a pair, and you can trade either member of a unit independently.
(2) The preferreds have first claim on dividends and first claim on net asset value (NAV) if the fund is dissolved. But both of these claims are capped.
(3) Because the preferred share claim on NAV is capped, the common shares claim all gains above the cap (less management fees, which typically are high). This amounts to leveraged capital gains (or losses) for the common shares, and this is what you get for the high management fees.
(4) An example of the leverage: let's say the net asset value of a unit is currently $15, the preferreds are fixed and capped at $10 in perpetuity, and the commons are therefore worth $5. If the unit NAV rises to $16 (up 6.7%), the preferreds do not change their share of NAV but the commons share of NAV is up 20%. So in the neighbourhood of $15 NAV, the commons have triple leverage.
(5) The 'dividend' paid to commons is extracted from capital gains on the underlying stock. The true dividends from the underlying stock usually go to the preferreds, sometimes helped by covered calls, and any leftover goes first to the management fees. If NAV does not rise enough over time to cover the payouts to the commons, the fund's NAV trends down. If this happens for long enough, the payout to commons will be halted. If longer still, the payout to the preferreds will be halted.
Split funds allow you to achieve accelerated capital gains (or losses). The fees you pay can be high, and the funds are often illiquid on the market. ENS has been one of the safer split funds of the ones I've looked at, but safety goes hand-in-hand with lower returns. There are other split funds that have offer higher returns in exchange for higher risk.
Be sure to read the prospectus before buying into a split fund. The details are important for assessing risk.
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autofocus111 wrote: I'll bite... How does a company that invests solely in ENB common shares have a higher yield than the underlying ENB shares? Does it issue debt or shares to cover the shortfall? What wonderful magic... not.
>>>The class A shares were offered at $15 apiece to yield 10.4%...E Split invests in common shares of Enbridge Inc. (ENB.TO)