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
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
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.