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Investors looking for
huge returns need look
no further than a closed end fund run out of Asheville , North Carolina
At Cornerstone,
investors are receiving "distribution yields" of roughly 22% of net
asset value, and the shares trade for much more than the value of their
underlying assets. According to the WSJ Market Data Group, the Cornerstone
funds are the three highest-yielding of the 657 closed-end funds in the U.S.
Wow, how do they do that?
Actually it is a lot easier than you might think, in fact it’s no
trouble at all.
Most of the yield at
Cornerstone, however, doesn't come from its investments. In past years, it came
from giving investors some of their original assets back. Now, it comes out of
money the funds' investors have just added.
In each of the past
five years, the Cornerstone
Progressive Return fund
distributed more than 10 times as much in dividends and other payouts as it
earned in net investment income.
In 2008 and 2009, for
example, 93% of total distributions were return of capital—giving shareholders
their own money back (after subtracting the manager's fees, of course).
By the end of 2010,
assets had shrunk to just $55 million from $132 million in 2007. At that rate,
the fund would pay out its entire portfolio by 2014 or 2015—a kind of
high-yield hara-kiri.
Is this legal?
Apparently so, because regulations of investing and securities in America is
based on disclosure. In other words as
long as the sponsors fully disclose what they are doing then they are probably
not violating any laws or regulations.
As for the investors,
Still,
Mike Taggart, an analyst at Morningstar, says he has received many emails from
Cornerstone investors who believe that they are earning 20% yields and don't
understand that these funds are simply giving them their own money back.
"People
see the 'yields' on these funds and they jump in," he says, "and it
makes me sick."
So anyone who wants high yields can buy this type of
investment, and revel in the joys of self-delusion.
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