Premium or Discount on Close End Funds?

I recently read a write-up on Urbana (URB) on the excellent web site Value Investors Club.  Urbana is a 'closed-end' fund; basically a publicly traded corporation that owns shares of other companies. The article argued that the fact Urbana represents a value opportunity because its shares trade at a 40% discount to its net asset value (NAV).

I would argue differently.  Basic corporate finance says that a stock's value is equal to the discounted present value of its dividends.  Last year the fees and expenses of Urbana consumed all the interest and dividend income earned by its investments.  Plugging that fact into the dividend discount model (DDM), we should actually expect shares to trade at a 100% discount to NAV!  Sure, income should grow over time, but since the investment management fees are a % of the asset value, these will grow as well.

So the 40% discount might actually not be enough.  If all the fruit from the orchard or all the milk from the cow goes to the manager, how much is the orchard or cow actually worth?  In the words of John Burr Williams (who developed the DDM in the 1930s):

A cow for her milk
A hen for her eggs,
And a stock, by heck,
For her dividends.

An orchard for fruit,
Bees for their honey,
And stocks, besides,
For their dividends

I will admit that exceptional management could justify a closed-end fund's fees through selection of stocks that generate above average returns.  However I don't know that Urbana fits the bill; it basically invests in stock exchanges around the world.  If you believe these are great investments and that somehow Urbana's management will select better ones than you could (perhaps because it has access to private investments that you don't) then Urbana might represent value.

But blindly believing that because a closed-end fund trades at a discount to its NAV it represents value is a dangerous investment strategy.