The pattern of discount / premium behaviour is inherently cyclical, and well established over the past 145 years. When funds trade at a premium, new shares are issued or funds launched to meet this demand. For example, in recent years there has been strong demand for vehicles investing in ostensibly secure assets that offer a yield. As a result many closed - end funds investing in infrastructure are currently trading at premiums and issuing new shares.

Eventually supply exceeds demand and, often accompanied by a decline in the underlying asset class and reversal in fund flows, the funds begin to trade at discounts.

Discounts then narrow as a result of a reduction in supply of shares of these funds. There are numerous mechanisms for this reduction including share buybacks; returns of capital through tender offers or dividends; open - ending and redemption of shares; or a liquidation of the fund. These discounts to underlying asset value attract value and activist investors, some of whom specialise in lobbying the Boards and managers of closed - end funds to pursue one or more of the measures described above.

Eoin Treacy's view The same pattern of supply expansion contributing to market tops and the withdrawal of supply contributing to market bottoms is evident in every market traded asset class. The discount or premium of closed end funds offers a window on the popularity of the assets in which they invest but also gives us an indication of whether the supply of funds dedicated to the sector is likely to increase or decrease.

ARC Holdings, reviewed in the above report, trades at a discount to NAV of 22%. In common with other China related funds it has rallied over the last few months to break a medium-term progression of lower rally highs and a sustained move back below the 200-day MA would be required to question medium-term upside potential.

At the other extreme, Pimco's High Income Fund traded at a premium of 77% in July which has since contracted to 41%. The fund has rallied back to test the region of the 200-day MA over the last month but a sustained move above it will be required to question medium-term supply dominance