First Australia Prime Income Fund
, the subject of last Friday's
Fixed-Income Forum, announced today that no portion of its October distribution was a return of capital.
Since Nov. 12, when the fund told investors that an estimated 2 cents of its 6-cent distribution for October represented a return of capital -- rather than investment income or capital gains -- the fund had fallen 16.6%, from 6 to a low of 5 at Monday's close. On Wednesday, it was up 1/16 at 5 1/8.
The reversal is a stunning development, particularly for such a large fund. Some analysts see it as a purely positive development, while others say the fact that the fund made an incorrect estimate is reason enough to hold off on buying it.
The $1.7 billion closed-end bond fund invests primarily in Australian government bonds and is the second-largest closed-end bond fund, according to
Its price fell because some analysts and investors interpreted the Nov. 12 statement to mean that the fund was likely to cut its dividend, either at its next quarterly board meeting later this month, or at the subsequent one in March.
Now, the fund says: "Contrary to a previous announcement made by the fund, it has now been determined that no portion of the fund's October distribution was a nontaxable return of capital."
The fund's managers at
in Sydney, where the work day has ended, couldn't be reached. But Richard Strickler, managing director at
, said the discrepancy between the final, audited determination and the Nov. 12 estimate was probably due to the intricacies of international accounting.
"I don't know whether somebody made a mistake, or whether there were profits that settled in that period but hadn't been reported yet," he said. "As an international bond fund, we've got some pretty complex accounting, because you've got some currency issues there."
Mariana Bush, closed-end fund analyst at
First Union Securities
, called the development "very unusual, especially for such a big fund. And because it's so unusual, I still don't feel 100% comfortable. The fact that they did have a mistake makes me wonder what's really going on." Bush said she wanted to see the fund's annual report, which hasn't been released yet, before determining whether the shares are attractive.
Paul Mazzilli, director of closed-end fund research at
Morgan Stanley Dean Witter
, agreed. "It's a mystery to me why they would issue this and then be able to reverse it. It makes it clear they're close to the edge unless they can realize some more gains." Mazzilli put an underperform rating on FAX after the Nov. 12 announcement.
But Michael McGrath of
(which has done underwriting for the fund) say this is a positive development that should goose its share price. Rollenhagen concedes that "it's not commonplace" for a fund to make an erroneous estimate, but says: "Given the alternatives, I'd much prefer a fund -- particularly this fund -- to err on the side of the conservative."
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TSC Fixed-Income Forum aims to provide general bond information. Under no circumstances does the information in this column represent a recommendation to buy or sell bonds, funds or other securities.