Attractive Closed-End Fund (CET)

Central Securities Corporation (ticker:CET) is a closed-end fund that organized in 1929 and runs a concentrated portfolio mainly invested in US stocks. It is attractively priced and currently sells at a discount to NAV of 18.81%. Part of the reason for the large discount is that about 30% of the assets are invested in a single illiquid restricted investment with a very low tax basis, The Plymouth Rock Company. Plymouth Rock sells auto insurance and has performed very well for CET over the years.
When a fund values a portfolio, there are three kinds of “fair value” based on the observability of the market price.
• Level 1 — Quoted prices in active markets on major exchanges.
• Level 2 — Other significant observable data obtained from independent sources; for example quoted prices for similar investments or the use of models or other valuation methodologies. For CET, the Level 2 investments consist of short-term investments, carried at amortized cost.
• Level 3 — Investments in which there is little, if any, market activity. CET owns two Level 3 securities- a large position in The Plymouth Rock Company, Inc. and a small $300,000 position in Aerogroup International, Inc.
The fund purchased 70,000 shares of Plymouth Rock equity back in 1982 and 1984 for a total cost of only $2.2 million and they currently value that stock at $2,000 a share or $140 million.
But the CET valuation seems too low for Plymouth Rock. Every year, Plymouth Rock commissions an outside and independent appraisal of their stock. The last appraisal was in early 2009 and the fair market valuation was $3265 a share. After applying a 20% discount for lack of marketability, the discounted price value is $2610 which is substantially higher than the $2,000 value actually used by CET management to compute the NAV of its portfolio. The overall market has appreciated considerably since early 2009, so the current fair market price for Plymouth Rock would be even higher.

Here are some other bullet points on CET as a long term investment:

1. Low expense ratio: The annual expense ratio has traditionally been very low- around 0.60%. But in the last semi-annual report it was rose to 0.83% due to the drop in assets that occurred in 2008 and early 2009. Since June 2009, assets have grown and the next reported expense ratio should decrease again.

2. Low turnover ratio: The CET management does very little trading and the last reported turnover ratio was only 2.53%. So the “hidden” trading costs caused by the bid-asked spread and adverse market impact are very low compared to most other mutual funds and closed end funds.

3. Good long term investing performance: As of 9/30/2009, the 10 year annualized NAV return for CET was 5.42%. Morningstar places CET in the top 1% of its category for that time period.

4. The top ten stock holdings for CET as of September 30, 2009 were:

Stock Name . . . . . . . . . . . . . . . . . . % of Net Assets
Plymouth Rock . . . . . . . . . . . . . . . . . . .   29.4%
Agilent Technologies . . . . . . . . . . . . . . . . 5.4%
Brady Corp. . . . . . . . . . . . . . . . . . . . . . . . . 4.6%
Bank Of NY Mellon . . . . . . . . . . . . . . . . . . 4.1%
Coherent Inc. . . . . . . . . . . . . . . . . . . . . . .  4.1%
Murphy Oil Corp. . . . . . . . . . . . . . . . . . . .  3.6%
Convergys Corp. . . . . . . . . . . . . . . . . . . . . 3.5%
Dover Corp. . . . . . . . . . . . . . . . . . . . . . . . . 3.3%
Intel Corp. . . . . . . . . . . . . . . . . . . . . . . . . . 2.9%
Devon Energy Corp. . . . . . . . . . . . . . . . . . 2.8%