One of the common rules investors use when researching closed-end funds (CEF) is to always buy at a discount. For example, when a CEF is trading at a discount of 12% the investor is looking at buying a $1.00 of asset for $0.88. Technically, this is correct as the NAV is 12% higher than the market price. So the investor is thinking that the CEF will increase its market price to the NAV providing them with a capital gain. However, this is not always true. The NAV can decrease to the market price creating a capital loss. What is the solution to find the right value of the CEF? The solution is to research and identify the relative discount to market price using the Z Statistic.
The Z statistics is used to measure a funds discount/premium relative to its average discount/premium. The equation is current discount minus average discount / standard deviation of discount. A negative Z statistic indicates that the current discount is less than the average discount. For CEFs, I use a -2.00 or more Z statistics as the indicator is showing an undervalued CEF. It is important to note that the z statistic is not a market timing indicator that identifies CEF entry points. The negative Z statistic can become even more negative if the market price is still falling and has not bottomed yet.
Using the Z statistic, I have identified 3 CEFs that are undervalued. This valuation is based on a -2.0 or more z statistic based on a 1 year Z stat. These CEFs will require more research but warrant a place on your CEF watch list.
Alpine Total Dynamic Dividend (NYSE:AOD) seeks high current income and capital appreciation through investment in global equity securities. It has a current market price of $4.51 with a NAV of $4.91. It has monthly distributions with a yield of 14.63%. It has not returned any capital through distributions in the past year. Its 1-year Z stat is -2.63. It has a total return of -12% in the past year. Its next ex-date is December 21 2011. Since inception in January 2007, AOD has made $7.79 in total distributions.
Calamos Convertible Opp Inc (NASDAQ:CHI) seeks current income and capital appreciation through investment in convertible and non convertible income securities. It has a current market price of $11.41 with a NAV of $12.03. It has monthly distributions with a yield of 9.97%. Its 1-year Z stat is -2.21. It has a total return of -4.16% in the past year. Since inception (June 2002), it has gained more than 9% on an annualized basis. Until recently, the fund traded at a fairly persistent premium, which was because of its relatively strong performance and its strong distribution policy. It is currently trading at a 3% discount, but this can be attributed to general market weakness.
CBRE Clarion Global Real Estate Income (NYSE:IGR) seeks high current income with capital appreciation through investments in income producing real estate equity securities. It has a current market price of $7.02 with a NAV of $8.08. It has monthly distributions with a yield of 7.78%. The fund currently pays a $0.045 per share distribution but is estimating a portion of each monthly distribution this year is from return of capital. Its 1-year Z stat is -2.05. It has a total return of -3.36% in the past year. This fund has had mixed absolute performance, mostly because of the poor performance of the overall real estate sector. The fund is currently trading at a 12.4% discount, which is slightly wider than its six-month and three-year averages of 10.0% and 11.6%, respectively.
Source: Get Rich Investments.