The percentage of Closed-End Funds (“CEFs”) whose share prices are currently trading at a discount to their Net Asset Values (“NAV”) is approaching the cyclical record low (high percentage) of 1999. Currently, 95.3% of all CEFs are trading below their respective NAVs as of 10/29/08. The group’s aggregate average discount is currently -11.8%. This is approaching the record year-end level of 1999 when the percentage of CEFs trading at a discount to NAV was 96.7%. At that time the aggregate average discount was -13%. (The stock market troughed in August of 1998.)
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Many technical analysts cite CEF discounts as one factor in looking for a stock market bottom. Large CEF discounts are symptomatic of retail investors’ panic selling—typically coinciding with a market bottom. Whether we’re at a market bottom can only be determined in retrospect. Nonetheless, we’re probably closer to a stock market bottom than to its top.
Can lightning strike twice? My analysis included those 212 CEFs that were “going-concerns” continuously from 1993 to present (10/29/08=2008). I looked for those CEFs that showed the greatest total return in the calendar year 2000—following the 1999 CEF discount trough for which numbers were available.
The top 5 CEFs with the greatest total return are depicted in the chart below. Whether these CEFs could again benefit from a recovery in 2009—if 2008 is a trough year for CEFs’ discounts—is subject to the unique economic and capital market factors indigenous to this cycle; but, what we know factually is this: these CEFs did recover from the deep 1999 trough.
Current CEF Screen: I also ran a screen for current CEFs which might be attractive investments based upon the following characteristics: 1) greater than $200 million in total Assets; 2) no Adjustable Rate Preferred stock; 3) expense ratio less than 1%; 4) discount of at least -15%; 5) share price declines greater than declines in NAV. Those stocks are as follows:
Disclosure: Author holds long positions in HQH, PEO, MCR