United Corporations Ltd UNC CN
December 16, 2004 - 4:23pm EST by
2004 2005
Price: 43.20 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 527 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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United Corporations Limited (Bberg ticker UNC CN) is a closed-end equity fund trading at a 34% discount to Net Asset Value (NAV). UNC differs from many other closed-end investment funds that trade at large discounts to their NAV in two respects. One, UNC effectively has no debt. It has some preferred shares, but these represent 1% of the total assets of the fund. So, the discount to book does not reflect any risk of leverage. Two, UNC is invested in large-cap liquid stocks. Many other funds trade at a discount because of illiquid or obscure holdings. UNC’s portfolio is filled with large-cap, blue-chip names.

UNC’s discount leverages the portfolio by 50%. The costs of this leverage are management fees and investment decision input.

The first of the two costs is easy to quantify. According to the fund’s website (www.ucorp.ca), the fiscal 2004 management expense ratio was .37%. If this is considered a financing cost of getting the benefits of the discount to NAV, it works out to about 1.1% (.0037/.34).

The second of the two costs is much harder to feel comfortable about. Currently management of the fund is split between Jarislowsky Fraser and Sanford C. Bernstein. We are not going to try and quantify this as a percentage. The 5, 10 and 20 year annualized returns of the fund based on market price according to Bloomberg are 8.9%, 13.7% and 14.8% respectively.

The fund offers a diversified portfolio of large-cap blue-chip stocks with a 40% allocation to Canada, 25% to The United States and 22% to Europe. The five largest holdings are: Algoma Central Corporation (ALC CN), Bank of Nova Scotia (BNS CN), Manulife Financial Corporation (MFC CN), Royal Bank of Canada (RY CN), and Toronto-Dominion Bank (TD CN). Other large holdings include Altria, Pfizer, and GE.

The fund’s discount has been larger at times in the past, but at that time, the fund had a much larger exposure to Canada. The fund recently (in 2003) amended its investment strategy to include more international investments. Since the end of 2002, UNC has increased it’s exposure to international stocks (US and the rest of the world) from 39% to 60%.

It’s possible to short some of the components of the fund and increase the effect of the discount. This is because the stocks shorted are sold at NAV and purchased through the fund at a discount to NAV. However, the largest holding of the fund, Algoma, is very illiquid, and the fund is actively managed, so a hedge will not be perfect as the holding could be traded away between reporting dates.

This fund has been a closed-end fund since 1929. At issuance it was capitalized with an NAV of $32mm of which $25mm was debt. Poor timing. By 1932 the fund had defaulted on its debt and was reorganized, with the bondholders receiving a combination of debt and equity in the reorganized company. Early on the fund focused on de-leveraging the balance sheet and since 1987 the fund had no funded debt and UNC has not issued any additional preferred shares since 1963.

Currently, UNC has four share classes:

12,194,193 Common Shares

52,237 Series A $1.50 Preferred Shares

80,290 Series B $1.50 Preferred Shares

119,710 Series C $1.50 Preferred Shares

The preferred shares represent $7.7mm of $759mm of the fund’s total assets at their redemption values.

This is not a recommendation to purchase the shares based on a conversion to an open-ended fund. The fund’s management indicated that while there is periodic interest from investors who would like to see the fund open, the fund has significant insider ownership and management would like the focus of the fund to remain long-term, and a closed-end structure is the most conducive to that aim.

If one believes that purchasing a diversified mutual fund is a sure way to lag the market by a margin equal to management fees plus (mis)management costs, UNC with a .37% expense ratio at a 34% discount to NAV more than makes up for the expenses and allows for some mismanagement as well. Another similar fund is Economic Investment Trust Ltd. (EVT CN), but EVT is much less liquid.

Note: All funds CAD.


Changes in portfolio exposure.
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