The Closed-End Fund Discount

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Researching mutual funds has been the "wheelhouse" of our firm since the beginning. In the early 's, we started researching Closed-End Funds in what seemed like a natural progression for our research capabilities. The research we uncovered was compelling, and inevitably led to the formulation of a proprietary investment strategy, and discretionary portfolio management.

Today we are one of only a handful of firms across the United States who specialize in managing portfolios of discounted Closed-End Funds for our clients. However, there are a number of key differences that make CEFs unique:. The CEF market is inefficient. Generally speaking, proponents of an efficient market believe that all publicly available information about an asset is reflected in the asset's price. In contrast, an inefficient market is one where all publicly available information about an asset is not necessarily reflected in the asset's price, suggesting bargains are available.

How to Invest in a Closed-End Fund - Personal Finance -

Based on the success of various accounts we managed during that focused on discounted CEFs, we began managing a partnership to capitalize on what appeared to be a steady relationship between large discounts and high subsequent total returns. The results were almost entirely satisfactory. In , we decided to investigate whether this relationship had historically persisted over time. Surprisingly, we found no evidence that anyone had ever engaged in such an investigation before.

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Academic studies were scarce, and we found none dedicated to answering the simple question:. Do large discounts lead consistently to higher total returns? We quickly found that nearly all the databases with information about CEFs threw out the data when funds went out of existence either through liquidation, merger, or conversion into an open-end fund. Historically, for U. Results are statistically significant across time, and across different CEF types. A simple investment strategy based on discounts demonstrates impressive long-term results:.

Source: Matisse Capital.

This graphic is a basic representation of Closed-End Fund returns and should be used for illustrative purposes only. There are other factors that can increase or decrease the total return of a Closed-End Fund. Since Inception 1. Performance Analysis 8. Our since-inception risk stats vs. All returns longer than 1 year are annualized unless noted. Past performance does not guarantee future results, which may vary.

The value of investments and the income derived from investments will fluctuate and can go down as well as up.

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  • Closed-End Fund?

A loss of principal may occur. For details of the performance calculation method, please download our separate audited report. Benchmark returns, by contrast, do not reflect a deduction for fees. You cannot invest directly in an index. Performance comparisons are for illustrative purposes only and are not a forecast of future returns. Alpha, beta and R2 are annualized since inception.

Huge Closed-End Fund Discounts Creating Buying Opportunity

Closed-end funds involve investment risks different from those associated with other investment companies. First, the shares of closed-end funds frequently trade at a premium or discount relative to their net asset value. When one purchases shares of a closed-end fund at a discount to its net asset value, there can be no assurance that the discount will decrease, and it is possible that the discount may increase and affect whether one will realize a gain or loss on the investment. Second, many closed-end funds use leverage, or borrowed money, to try to increase returns. Leverage is a speculative technique and its use by a closed-end fund entails greater risk and leads to a more volatile share price.

If a closed-end fund uses leverage, increases and decreases in the value of its share price will be magnified. Finally, closed-end funds are allowed to invest in a greater amount of illiquid securities than open-end mutual funds. Investments in illiquid securities pose risks related to uncertainty in valuations, volatile market prices, and limitations on resale that may have an adverse effect on the ability of the fund to dispose of the securities promptly or at reasonable prices. The Education Center is a collection of external research and articles that we have found to be important, interesting, or helpful in understanding closed-end funds.

Closed-End Fund Key Concepts. Closed-End Fund Types and Strategies. Considerations and Risks of Leverage. Discounts and Premiums. Discounts had a higher rating than long-term stability and income among financial advisors and investors polled in a recent Aberdeen survey. Closed-end funds are investment vehicles with a year history but often lose out in the popularity contest to mutual funds and newer-to-the-scene exchange-traded funds ETFs.

A possible explanation for this could be the perception that the unique structure of closed-end funds are complex and difficult to understand. However, by understanding the basics and core concepts of what differentiates a closed-end fund, investors can make the most of available market opportunities.

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  6. Closed-end funds are usually seen in client portfolios managed by financial advisers with the largest books of business. In a few simple paragraphs, you can also learn how to take advantage of these sophisticated investments. First, let us understand what a closed-end fund is and how it is structured. Like an open-end mutual fund, closed-end funds invest in a portfolio of securities pursuant to a specific investment object and strategy.

    However, open-end mutual fund shares are purchased and sold from the Fund directly, which means funds can grow or shrink over time subject to investor demand. The shares of the funds are traded on the secondary market like any other listed equity security such as Google, Apple or GE. There is no need to trade the portfolio to meet redemptions and sale activities. This greatly reduces transaction costs and enable portfolio managers to remain fully invested which in turn enhances the returns to investors.

    Sales and purchases in open-end funds often increase during times of market volatility as investors risk appetites change. As closed-end fund shares are traded on the secondary market, the value of the shares is determined by the market, rather than the NAV of the Fund.

    The Month in Closed-End Funds: May 12222

    Shares are said to trade at a discount when the share price is lower than the NAV, and at a premium when the share price is higher than the NAV. The nuance with closed-end funds is that instead of buying into one company, investors are buying into a certain asset class, sector or country. Why does discounting happen? Discounts and premiums within the broader closed-end fund market rise and fall depending on business cycles and market sentiment.

    Discounts and premiums on individual closed-end funds are influenced by varying factors and can change over time.

    Is Now a Good Time to Invest in Closed-End Funds?

    Closed-end funds typically reach their widest margins during periods of market turbulence coupled with heightened investor pessimism. Discount widening can further expand in asset classes that have experienced elevated levels of underperformance in a given year. Widening discounts are one of the latest shifts that those polled in the aforementioned survey said they have been noticing in the space. Widening discounts are also a way for investors to purchase closed-end funds below their fair market value during tax periods. Specifically, the effects of tax loss selling have historically been most prevalent during the day period between November and mid-December.

    Tax loss selling is the tactic that investors use for identifying and potentially liquidating underperforming funds to reduce tax burdens. Market prices have tended to outperform NAVs toward the end of the year and into the early months of the following year. Many investors find the discount element of closed-end funds attractive, but what else can these funds offer?

    Closed-end funds have primarily been viewed as income engines and another tool for portfolio diversification. Over longer market cycles, closed-end funds can potentially provide higher returns than some open-end mutual funds.

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    The Closed-End Fund Discount The Closed-End Fund Discount
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