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Summary Many investors seek to allocate part of their portfolios to precious metals, given the prevalence of “money printing” by central banks around the globe. The Central Fund of Canada is one vehicle that is likely to deliver alpha in addition to metals exposure. It’s currently trading at a 10%+ discount to NAV, with building activist involvement. Background on Closed-End Funds For those that want exposure to a particular sector or asset class, closed-end funds sometimes represent a cheaper vehicle than alternatives like ETFs and traditional mutual funds. This is because ETFs and conventional mutual funds frequently redeem/issue new shares to ensure that the price per share remains in line with the net asset value of the underlying holdings in the funds. This is not the case for closed-end funds. Rather, the share price of closed-end funds is driven by the market forces of supply and demand, which sometimes creates attractive opportunities to buy stakes at big discounts to NAV. This tends to happen when sentiment for the particular sector on which a closed-end fund focuses becomes negative, causing some investors to sell irrespective of price. This is currently occurring in few segments of the closed-end fund universe, including fixed income, emerging markets, and commodities. I previously wrote about one such opportunity to obtain federal tax exempt muni bond exposure at a 10%+ discount and another to buy Asian bond exposure at a 15%+ discount. Here, I’ll cover an opportunity to buy gold/silver exposure at a discount. Central Fund of Canada Overview The Central Fund of Canada (NYSEMKT: CEF ) was established in 1961 by Philip Spicer as a means of providing investors with a safer, more cost effective way of holding gold and silver than individual ownership. In particular, the fund’s mandate is to invest at least 90% of its net assets in gold and silver bullion (today this figure is 99%+), which is stored in the highest security rated treasury vaults at a Canadian chartered bank. Investors are able to avoid the transactions fees and sales taxes that can accompany direct individual ownership of bullion, though the fund does have an annual expense ratio of approximately 0.3%. As shown below, at many times in its history (particularly when precious metals prices were appreciating and sentiment was strong), investors were willing to pay a material premium to net asset value for shares in the fund. Likewise, at several times (when sentiment was weaker) shares have traded at a meaningful discount to NAV. Today, with precious metals having been in persistent decline for the past few years, the shares trade at a ~10.3% discount, which is near its highest historical level. (click to enlarge) Source: CEFConnect Portfolio Composition The fund provides ongoing updated figures for its NAV per share as well as the composition of its portfolio via its website . Currently, 61.4% of the portfolio is in gold bullion, 38.4% is in silver bullion, and 0.2% is in cash and other net assets. Source: CEF NAV Report What will Cause the Discount to Decline? If/when sentiment in the precious metals sector stabilizes, it’s reasonable to expect the discount to decline given the tendency for this to occur many times in the past, as shown above. In the meantime, there’s also another notable potential catalyst. One of the fund’s large shareholders, Sprott Asset Management (including other investors they represent), holds about 5% of outstanding shares and has recently been taking steps to compel the fund’s management to consider actions to narrow the discount (e.g., through offering investors the option of improved redemption terms). For instance, in June they requested that the fund hold a meeting among A share investors to discuss these issues, though management has resisted. Sprott took a similar activist stance with another Central managed fund, Central Gold Trust (NYSEMKT: GTU ), which has been gaining some traction such that this fund’s discount has declined to under 3%. It’s somewhat more difficult for Sprott to unlock shareholder value for the Central Fund of Canada for a couple of reasons. First, this fund is much larger than Central Gold Trust. More importantly, Central Fund of Canada has a dual share class structure that is highly advantageous to management. In particular, the fund has a very small number of voting shares that are majority owned by insiders, whereas the vast majority of outstanding (class A) shares are non-voting and owned by the public. This effectively enables management to retain control without requiring them to maintain a commensurate economic stake in the fund. However, it’s important to note that despite this dual share class structure, the Board still has a legal fiduciary duty to act in the interests of all shareholders. Given this duty, over time Sprott may be successful in its agenda (or management may preemptively take steps to reduce the discount to appease investors). But even in the highly negative scenario where they are completely unsuccessful, management makes no positive changes, and precious metals sentiment languishes further, investors’ downside is constrained due to the fact that since 1989, A share holders have had the option on a quarterly basis to require the company to redeem their shares at 80% of NAV. Conclusion A number of renowned investors (e.g., hedge fund managers Paul Singer and Ray Dalio) espouse the benefits of holding a portion of one’s portfolio in precious metals, particularly given widespread monetary easing around the globe. For those that follow this path, the Central Fund of Canada is a vehicle worth considering given its current large discount to NAV and potential catalysts for convergence. However, U.S. investors should be aware that this fund is considered a Passive Foreign Investment Company or “PFIC.” The tax rules surrounding PFICs are complex, and can subject investors to burdensome reporting requirements particularly if they own more than $25,000 in PFIC securities outside of a qualified/tax-exempt account.