Three Closed-End Funds of Funds

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Includes: ADX, BIF, FOF
by: George Spritzer, CFA

Recently a new closed-end fund containing other closed-end funds was created - the Cohen and Steers Closed-End Opportunity Fund (NYSE:FOF).

This fund is large and originally raised around $460 million in assets. They haven't disclosed their portfolio yet, but have most likely purchased closed-end funds selling at a discount to NAV. I believe this fund is partially responsible for the shrinking discounts to NAV we have recently seen in many closed-end funds. Ironically, they are not permitted to buy other Cohen and Steers closed-end funds, which would explain why their UTF and RTU funds now have higher discounts to NAV than most other closed-end funds.

FOF currently sells at a premium of 3% over NAV and has a management fee of 0.95%, so I see little reason to buy it at this time. But it might become interesting if it ever develops a discount to NAV in the future.

But there is another fund - Adams Express (NYSE:ADX) - that looks very interesting right now which offers a "double" discount to NAV. ADX is very similar to an S&P500 index fund and owns many of the top blue chip stocks- stocks like GE, AIG, BAC, MSFT and PFE are big holdings. ADX has a low expense ratio of 0.47% and currently sells at a 13.37% discount to NAV. But instead of holding a large energy stock like XOM, they own another closed-end fund PEO which also sells at a discount to NAV of 9.84% and has a low expense ratio of 0.54%. The top four holdings of PEO are large cap energy stocks- XOM, CVX, SLB and COP.

A good way of evaluating ADX is that you are getting a 13.37% discount on most of the portfolio, but you get a "double" discount on the energy holdings like XOM that are in PEO. The double discount percentage may be computed as follows:

DD= 1.0 - (.8663)*(.9016)= 0.2189 or a 21.89% discount to NAV.

This is very attractive, since the combined expense ratios of both ADX and PEO combined is only 1.01% which is lower than most individual closed-end funds.

There is at least one other discounted closed-end fund that owns other closed-end funds but it doesn't seem that attractive -- Boulder Total Return Fund Inc. (BTF) : Sells at a discount of 7.66%. Invests around 10% of its portfolio in about a dozen other closed-end income funds selling at discounts to NAV.

But the problem here is that the BTF expense ratio is 2.23% (not even including the expense ratios of the underlying funds). Way too high for me.