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 (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 (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 (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.
