Sign of a Market Top? Closed-End Funds Trading at Premium to Net Asset Value

The Herzfeld Closed-End Fund Average recently moved to a premium to net asset value [NAV] for the "first time in my memory", according to Barron's columnist Randall Forsyth. A reminder: closed-end funds issue a fixed number of shares that are free to trade above or below their net asset value; new funds often price initially at premiums to NAV due to promotion by brokers (and irrational investor behaviour), but tend to revert quickly to discounts to NAV. The Herzfeld Closed-End Fund Average measures the average discount or premium to NAV for a broad index of closed-end funds, and recently moved to an average premium -- a phenomenon almost without precedent. A number of funds swung dramatically from discounts to premiums to NAV in 2006, such as the Cohen & Steers Worldwide Realty Income Fund (RWF). Many closed-end funds now site at hefty premiums to NAV, including the Zweig Total Return Fund (ZTR), the Cornerstone Total Return Fund (CRF), and the Cornerstone Strategic Value Fund (CLM). Closed-end fund investment veteran David Tepper of Tepper Capital Management says that the only funds still attractively priced below NAV are "old school" funds like General American Investors (GAM) at a 9.22% discount, Adams Express (ADX) at a 13.84% discount, and Central Securities (CET) at a 13.24% discount.

Sources: Barron's Online, ETF Connect's fund sorter
Commentary: CEF Long-Short Pair Trade: Premiums vs. Discounts, 1929's Closed End Fund Craze: Lessons For Today, Cornerstone CEFs: What's In A Return?, Dividend Cuts Coming At Cornerstone Funds – Will The CEF Hold Up?

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