John Hancock Merging Five Closed-End Stock Funds

Unlike open-end funds, which issue and redeem shares upon demand at their net asset value, closed-end funds issue a fixed amount of shares that trade throughout the day like stocks. This structure makes it easier for the funds to stay fully invested, potentially boosting returns, since they don't have to keep cash on hand to meet redemptions or put large amounts of new money to work. But shareholders who want to cash out have to find another investor willing to take the stock off their hands. When trading is illiquid, they may have to be willing to accept less than the value of the fund's holdings.

All five of the Patriot funds being merged have persistently traded at discounts to their net asset values. As of March 13, the Premium Dividend II's shares traded at a 12.2% discount to their NAV, while Premium Dividend I was trading at a 13.48% discount, Global Dividend traded at an 11.28% discount, Preferred Dividend Trust traded at a 6.73% discount, and Select Dividend Trust traded at a 13.44% discount.

So far, the filing of the proxy hasn't had much effect on the market for the funds or their respective discount rates. But "it'll be a different scenario when people actually receive their proxy in the mail," Arnott says.

He says combining the funds would allow the management company to spread certain fixed costs over a larger asset base, lowering expenses.