One of the main reasons people like shopping is bargain hunting. This art, as they like to call it, can also be applied to closed-end funds. Burton G. Malkiel proposed this kind of procedure in his book A Random Walk Down Wall Street. When Dr. Malkiel's book was first published in 1973 many CEFs (closed-end funds) traded at a discount of 25-40% to net asset value. The prospects of owning such a discounted CEF were great, because the prices usually converged to NAV (net asset value). This allowed investors to realize positive returns even if the fund itself churned out mediocre results. Unfortunately those magnificent value opportunities hardly exist these days. But while huge discounts are rare, there are still occasional bargains to be had.
The India Fund, Inc. (IFN)
Meet the India Fund, Inc. by Aberdeen Asset Management. IFN is currently (as of 31 Dec' 2012) trading at $20.91 with NAV of $23.79 for a discount of 12.11%. For those not deeply immersed in CEFs: this means that the underlying assets, the stocks and bonds in the case of The India Fund, per share are worth more than the price paid (i.e. if the fund liquidated instantaneously you would end up with a profit of 13.78%).
The following information is taken from here. The main objective of the India Fund is long-term capital appreciation. Adrian Lim, Senior Investment Manager at Aberdeen Asset Management, speaks the common language of value investing. No tricky strategies like market timing here.
Financials are strongly represented at 26% of the NAV. What's more important is the strong predisposition towards Consumer, Non-Cyclical and Consumer, Cyclical. Consumer spending has grown vastly over the last years and is expected to thrive on India's GDP growth. One of the main strengths they argue, in my view absolutely correct, is the tremendous growth opportunity for companies in India:
Projected GDP growth for India is 6% in 2013 according to the IMF World Economic Outlook (WEO) 2013. In addition, according to the IMF's GrowthTracker India's rate of growth is increasing. This implies that in addition to stellar growth for the year 2013 this growth is expected to increase for the years to come. One of the implications is that the valuation for Indian stocks are likely to improve.
The graph below shows the India Fund's 2012 performance relative to the MSCI India index. The fund slightly trails the index over the course of the year. In times of a strong increase in stock prices IFN seems to lag significantly, but it regains position in downturns. This most likely follows from the fact that the fund mostly invests in hand-picked securities and thus avoids high risk-return stocks in favor of Indian "blue chip" stocks.
Interesting to note is the fact that the fund alternates between trading at a discount or premium. Should this trend continue this would imply that investors can double-dip profit from India's stellar growth and the alternation from discount to premium.
As with any investment returns are accompanied by risk. In the case of IFN this entails a possible downturn of the Indian economy, which seems unlikely from the facts layed out in the IMF WEO 2013. Another possibility is the global impact of the U.S. monetary policy. Times have become increasingly uncertain with the U.S. government denying to take definite measures. Please note that Indian securities trade at a slight premium to their historical P/E, which implies that any serious impairment in growth could affect stock prices vastly.
In this case execution is simple and straightforward. Simply buy the fund for a long holding period as long as the discount doesn't evaporate quickly and turns into a premium. Convergence to NAV usually doesn't happen overnight, so buy the fund with at least a one-year holding period in mind. Because of the strong underlying fundamentals I would advise active portfolio managers to watch the price more closely to catch further price/NAV deviations as to profit maximally from eventual long term convergence.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in IFN over the next 72 hours.