Closed-End Funds: Taking It on the Chin?

Midway through 2008, we looked at the closed-end funds that trade at the highest discounts to their net assets. But the discounts we saw then pale in comparison to the discounts we see now. Consider the largest discounts according to The Closed-End Fund Association ((CEFA)) now versus six months ago:

click to enlarge

We also saw that near the end of 2008, the median discount for closed-end funds rose dramatically, so the rise in discounts we see in the table above shouldn't come as a large surprise.

Of course, this doesn't mean these funds are automatic buys. While investors may appreciate the fact that they can buy assets for a discount in the form of closed-end funds, they should always do their homework (i.e. read the fund's quarterly reports) to ensure they understand what they are buying. For example, if fund holdings are out of date (due to declines in market value) or illiquid, the book value may not be an accurate assessment of the value of the fund's underlying holdings.

So, how would you have done had you owned these heavily discounted closed-end funds through the market turmoil that took place in the latter half of 2008? We'll explore that in a future post.

Disclosure: None

Comments

[Alan Young:]

I am shocked, *shocked* to hear that CEF investors are more bearish now than they were last summer.

However, stocking up on CEFs in December has proved quite lucrative so far.

Jan 22 10:14 AM

[Scott F:]

December did prove oversold, though less than November, but most of these ten funds are not remotely worth buying. They are at deep discounts and going deeper because they are crap. If you could buy a bag of rotten fruit at a discount to its peers, would that make it cheap? Also, these discounts in many cases are actually *understated*. These funds often have made-up dividends (i.e., return of capital), invented NAVs (Type 2 and 3 accounting evaluation methods), huge annual fees, and terrible long-term track records. The managers are largely incompetent and just milking the funds for their fees until they dissolve. These are only trading vehicles, and little more than gambling at that.

Jan 22 11:32 AM

[HighTower:]

I've read a number of Scott F's comments and I find them not only of little investment value I also find them annoying. He seems to have a shallow understanding of RIC’s and offers dismissive pronouncements without providing any source of support for his arguments. Stringing a couple of buzz word and throwing in terms like "crap" isn't real investment insight; it’s something I can get my 7 year old daughter to do.




On Jan 22 11:32 AM Scott F wrote:

> December did prove oversold, though less than November, but most
> of these ten funds are not remotely worth buying. They are at deep
> discounts and going deeper because they are crap. If you could buy
> a bag of rotten fruit at a discount to its peers, would that make
> it cheap? Also, these discounts in many cases are actually *understated*.
> These funds often have made-up dividends (i.e., return of capital),
> invented NAVs (Type 2 and 3 accounting evaluation methods), huge
> annual fees, and terrible long-term track records. The managers are
> largely incompetent and just milking the funds for their fees until
> they dissolve. These are only trading vehicles, and little more than
> gambling at that.

Jan 22 10:43 PM