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Designing a Strategic Payout Policy to Narrow Fund’s Discount to NAV (High-Risk)

Start year: 2023

Summary: Abstract: This project aims to design a new dividend payout policy for Capital Dynamics' flagship fund, ICAP. Using advanced analytical models and empirical simulations, goals are to: (i) Create an effective payout policy signaling the fund's bright future, (ii) Attract income-seekers, (iii) Motivate reinvestment to decrease the persistent NAV discount, (iv) Boost market liquidity perception, and (v) Minimize return volatility. The relation between dividend policy and the NAV discount of U.S. closed-end funds is pivotal for scholars and professionals. The NAV discount/premium mirrors the gap between the market price and the fund's underlying assets' value. Key insights include: Signaling Theory: Regular dividends can indicate a fund's stability, potentially reducing NAV discount. Income-seeking Investors: Consistent dividends might narrow the NAV discount by attracting such investors. Behavioral Factors: Regular dividends may cater to investor biases, thus reducing the discount. Liquidity and Reinvestment: Encouraging reinvestment can amplify demand, narrowing the discount. Market Perception: Strategic distributions can enhance perception, impacting the NAV discount. Tax Implications: Non-qualified dividends might deter some investors, affecting the discount/premium. Other Factors: Aspects like management quality, fees, and market conditions also play a role.