Last Minute Sales Remain in Closed-End Funds

Includes: BXMX, EXG, IGD
by: Johnny Discount

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 (NYSE: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 (NYSE:IGD) (see IGD Factsheet).
  • Eaton Vance Tax Managed Global Diversified Equity Income Fund (NYSE: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.