DSW Global Commodities Stock C GCS
August 05, 2006 - 10:40am EST by
2006 2007
Price: 16.50 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 452 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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DSW Global Commodities Stock Closed End Fund (GCS)


Summary:  If you want to own energy stocks because oil might go to $200 and commodities are in a multi-year Jim Rogers upswing but aren't sure of which stock to buy, GCS provides a chicken-hearted way of participating while at least giving yourself the illusion of some level of cheapness. As a closed end fund, you are buying some else’s expertise and paying someone else’s fee, and there is no control of the investment.  What makes the investment interesting is that you can buy this expertise for a decent discount and there is a mechanism in place to realize higher returns.     


Description:  GCS is a closed end fund investing in commodity related stocks and notes.  As of 6/30/06, energy was 41%, materials 38%, structured notes/commodity linked securities at 20%, and industrials at 1%.  The five largest holdings were ExxonMobil (7.2%), BHP Billiton (4.8%), Rio Tinto (3.8%), streetTRACKS Goldtrust (3.3%), and Schlumberger (2.5%).  As of 12-05, the funds’s expense ratio was 1.1%.  The fund is lead managed by Theresa Gusman of Deutsche Asset Management.   Please refer to the powerpoint presentation and annual report on the bottom link for management's view of the current commodities cycle.


Here’s what makes the fund interesting:


*fund trades for a substantial discount.  The current NAV is $19.36 with a market price of $16.50, for a discount of 14.8%.  It would take a 17.3% appreciation to reach NAV.  GCS’s discount has generally been higher than other energy related CEFs (including BGR, FEN, PEO, etc.).  The fund’s ytd discount has averaged 13.9%.


*fund holds 5% periodic tender offers until 2008 at 98% of NAV.   On a semi-annual bais, if the fund trades for more than a 10% discount to NAV during specific periods the fund holds a tender offer for 5% of the shares.  The tenders will continue on a semi-annual basis until 2008.


*strong recent performance.  NAV average annual returns as of 6-30-06 was 25.77% since inception in 9-24-04.  According to the Wiesenberger Closed-End fund Weekly Review, GCS had returns as follows to 7-28-06 (along with well-known exchanged traded fund SPDR Energy (XLE) comparison):


            NAV-ytd        52wk NAV     Market Price Rtn-ytd              52MP Rtn

GCS    12.5%              24.0%              8.9%                                        23.4%

XLE    15.6%              22.7%              15.6%                                      22.8%




*the discount exists.  There is no particular reason for the discount to narrow from here and it could always expand.  In theory, the tenders should act to reduce the discount but this hasn’t happened.   Of course, the discount could also contract. 

*tenders are of limited use if you aren't participating.  The tenders occur at 98% of NAV.  This isn’t like the company does a straight share buyback at a 14.5% discount.  If you aren’t participating in the tender, it doesn’t help much, and the only people who participate are those with a decent sized holding.

*undistributed capital gains.  I’ll update this when the 6/06 report comes out, but the CEF paid a substantial capital gains distribution on 12-30-05 ($1.64)     

*active management.  Time will tell if this is an advantage or disadvantage.     






periodic tenders may reduce tender or fund may continue to generate strong returns
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