Last Minute Sales Remain in Closed-End Funds

The historic occurrence of closed-end fund discounts reaching lows during year-end proved extremely opportunistic once again. In fact, investors who normally wait for year-end to purchase funds at 15% discounts, the traditional approximate discount floor, were met with levels significantly cheaper numerous times throughout the year.

Interestingly but not surprising, discount levels of funds were blind to asset class, NAV movement, etc. While there was great concern on funds that use leverage, funds that didn’t use leverage were equally as discriminated against. Even funds whose NAV held up incredibly well (for example, the Eaton Vance Risk Managed Diversified Equity Income Fund (ETJ)) were sold off to extreme levels at times. Oh, the beauty of an inefficient product/sector….

Before I mention why I find the following funds attractive, let me hide behind the “benchmark”. In this case, I define attractive as: likely to outperform general equity markets over the next few weeks (my guess- by mid-end of January). As a wise man once told me “it's not that there are a lot of buyers, it's simply because there are no more sellers”.

I am choosing the following funds for a few simple reasons.

1. The stocks in these funds are diversified and broadly overlap with generic indices (or common ETFs- SPY, EFA). If you are a traditional investor, you likely have either a generic index or index-like fund in your personal account or IRA. Therefore, unless you plan on selling for cash, you’re going to be exposed to the general equity market regardless. I would suggest switching into a closed-end fund comprised of like-assets but trading at ~20% cheaper. You’re likely to outperform the general market on your NAV (next point), and I would expect its discount to narrow.
2. The funds each write (sell) call options on their holdings. Without getting into specifics of the option strategies, selling calls will allow the fund to generate gains from the option premiums. With the VIX above 40, you’re likely getting paid fairly well to sell away some upside. And keep in mind, if the equity market does appreciate rapidly (which is potentially less positive for someone selling covered calls) the 20% discount will probably rip along with it…
3. These funds are fairly liquid as far as closed-end funds go. Perfect for a retail investor to pick up their shares. However, if you are an institution looking to cash in on discounts, you may have to wait until the next financial crisis…Building sizable positions now will be very difficult…(Remember what the wise man said).

The Funds

• ING Global Equity Dividend & Premium Opportunity Fund (IGD) (see IGD Factsheet).
• Eaton Vance Tax Managed Global Diversified Equity Income Fund (EXG) (see EXG Factsheet).
• Nuveen Equity and Premium Opportunity Fund (JSN) (see JSN Factsheet).

Lastly, please take a look at each fund's corresponding factsheet. While I group these funds together in the same category, on a detailed level their strategies differ quite a bit. For example, the percent of the portfolio on which calls are written varies substantially. Another example is IGD buys puts.

Disclosure: Author owns a small position in EXG.

Comments

[macsmart:]

From looking at charts it's clear that numerous closed end funds such as IGD, ERH, and IAF have started to move up considerably from their oversold levels.. They will likely continue their usual January rise.

2008 Dec 22 06:03 PM

[kurt walter:]

Check out etfconnect.com .. there are are so many closed-end funds with giant discounts it is overwhelming to chose from the list.

2008 Dec 23 04:25 PM

[Delojozafado:]

Overwhelming? Just filter out the funds that have leverage thru preferreds. These funds can blow up most easily if there is a problem with preferreds coming due. That is debt instruments coming due. This type of leverage is used to raise capital at a fixed rate that is then invested in the fund where the manager expects to out perform the debt rate. The unwind of this is obvious and can be seen in a Pimco investment like the "Relatively safe" Muni bonds, PMX. KAAAHH...BOOM!!! Stay away from these funds. BDJ, FAV and LGI(some EMM debt exposure) are in addition to the EXG and IGD. Also beware near term ex dates as the funds can drop off substantially post ex. Funds like RCC look great but the distribution is only semiannual. This leaves message board posters questioning "Why the big down move in the shares of RCC today?", after a distribution. In normal markets this would work out to be neutral but in these markets where you may have to get out with a stop ... As for the Nuveen perhaps not a reliable management in this environment. There have been rumblings. Chart others against these and see what the relative strength looks like. I agree with the comment about these being strong through Jan. These are still volatile investments and risky despite the huge discounts to NAV. Best to use stops and tighten stops one week after each ex-div date. All not with standing these are the best way to own blue chip equities in this market though! S&P 790 to 990 trading range has held up since early Nov. 1060 may be achievable with just a little good news. Watch your Top-Knots!!!

2008 Dec 24 12:20 PM

[Trader Dick:]

Anybody got a head's up on when NCZ may begin paying their dividend? The stock has been creeping up and is now up more than 25% from when they last paid the dividend.

2008 Dec 26 03:59 PM

[Scott F:]

I've been trading closed-end funds professionally for twenty years, and I often have a different take on these funds. Not better, per se, just different. I think these funds mentioned are reasonable. To me, JSN looks more like a short than nearly any of the buy/write funds. Nuveen is a lousy equity manager, out of their depths. Not much discount either. IGD looks neutral at current discount. Only EXG seems like a buy to me. But it's not much of a trading opportunity with its lower volatility. From a trading perspective I like INB and CHW better, but they are lousy to hold: leveraged and with excessive management fees. I don't think any of these funds are ones I'd want to buy and hold. You have to look at total returns with these funds, ignore the yield -- it's meaningless, arbitrary, and made up. Remember, most closed-end funds are poorly managed with excessive cost-structures. They generally are trading vehicles, not ownership material.

2008 Dec 30 06:12 AM

[Sapphire:]

Does anyone know what happens if a fund company decides to close (as in discontinue permanently) a closed-end fund which is trading at a discount? Would investors get back the market value of the individual stocks, or just the discounted NAV of the fund?

Jan 03 12:18 PM