Not all funds are the same. Choosing the best funds can save investors money as they construct their portfolios. Closed-End funds (CEFs) trading at a discount to net asset value are a source of potentially attractive ways to invest in many strategies. In a sense, they are on sale.
How do CEFs work? CEFs are mutual fund companies that buy and sell investments from a fixed pool of capital. Shares in CEFs are sold by current owners, often at values that are lower than the sum of their holdings. When you buy a CEF, your investment pays expenses to the fund manager. The hope of CEF investors is that the return on their assets will exceed the fund manager's expenses.
Investors should consider CEFs as alternatives to ETFs and direct stock ownership based on a handful of key factors:
Portfolio holdings. What are the strategy and style of the CEF's holdings? Do stocks in the portfolio have strong balance sheets?
Discount to net asset value. Does the CEF's trade at a lower price than the sum of its portfolio holdings? A deeper discount is better.
Expense ratio. The less that is paid to fund managers, the more investors keep.
Distribution yield. How much of the share price is returned to investors in the form of a dividend payment? The higher the dividend yield, the higher the portion of fund value that is liberated from future fund fees in future years.
CEFs were screened for sizeable discounts of at least nine percent. These discounted CEFs were screened based on a sample of its 25 top holdings. Funds with a large portion of sample holdings which are categorized as "safe" by the Altman Z-score, and with a small portion that are categorized as "distressed" are presented below:
Ticker | Company | Safe | Grey Zone | Distressed |
AGIC Equity & Convertible Income | 87.0% | 8.9% | 4.2% | |
Central Securities | 80.6% | 6.5% | 12.8% | |
Royce Focus Trust | 82.4% | 13.7% | 3.9% | |
Adams Express | 69.8% | 18.3% | 11.9% | |
General American Investors | 67.2% | 16.0% | 16.8% | |
Zweig | 86.3% | 0.0% | 13.7% | |
Clough Global Allocation | 57.2% | 22.8% | 19.9% | |
AGIC Global Equity & Convertible Income | 70.0% | 14.4% | 15.6% | |
Virtus Total Return Fund | 95.0% | 0.0% | 5.0% | |
FXBY | FOXBY CORP | 89.1% | 2.2% | 8.8% |
Liberty All-Star Growth | 90.0% | 4.8% | 5.2% | |
Calamos Strategic Total Return | 53.6% | 32.1% | 14.3% | |
Madison-Claymore Covered Call & Eq Strat | 67.6% | 14.9% | 17.5% | |
Madison Strategic Sector Premium | 69.2% | 17.4% | 13.4% | |
Eaton Vance Tx-Mgd Glbl Buy-Write Opp | 96.5% | 0.0% | 3.5% | |
Nuveen Equity Premium Advantage | 86.1% | 9.8% | 4.1% | |
Nuveen Equity Premium and Growth | 73.5% | 7.6% | 18.9% | |
Nuveen Equity Premium Income | 72.6% | 7.7% | 19.7% | |
Eaton Vance Tax-Managed Buy-Write Income | 83.1% | 6.4% | 10.5% | |
Eaton Vance Tax-Managed Buy-Write Opp | 86.9% | 6.0% | 7.1% | |
Eaton Vance Enhanced Equity Income | 81.9% | 3.7% | 14.3% | |
Eaton Vance Risk-Mgd Divers Eq Inc | 73.9% | 11.0% | 15.2% | |
Eaton Vance Tax-Managed Divrs Equity Inc | 77.9% | 11.3% | 10.8% | |
Eaton Vance Enhanced Equity Income II | 93.8% | 3.6% | 2.6% | |
Petroleum & Resources | 74.6% | 16.9% | 8.5% | |
Gabelli Healthcare & Wellness Trust | 67.3% | 23.6% | 9.0% | |
Boulder Total Return | 88.5% | 7.5% | 4.0% |
Sample holdings for each fund were used to estimate an mean market capitalization and price-to-book ratio. These estimates as well as expense ratio, discount, and distribution rates are provided below:
Ticker | Average P/B | Market Cap Average ($Millions) | Strategy | Discount | Dist Yield | Fee |
NIE | 4.0 | 97763 | Convertible Secs | -9.09% | 6.30% | 1.10% |
CET | 2.1 | 28447 | Core Funds | -17.37% | 5.40% | 0.78% |
FUND | 2.7 | 38697 | Core Funds | -11.80% | 6.01% | 1.37% |
ADX | 3.3 | 126472 | Core Funds | -14.49% | 4.61% | 0.58% |
GAM | 4.0 | 68033 | Core Funds | -14.77% | 3.18% | 1.54% |
ZF | 4.8 | 89113 | Core Funds | -11.14% | 10.22% | 1.23% |
GLV | 2.4 | 60967 | Global | -13.12% | 8.63% | 2.87% |
NGZ | 3.9 | 102781 | Global | -9.47% | 8.40% | 1.18% |
DCA | 5.6 | 80454 | Global | -12.29% | 8.72% | 1.90% |
FXBY | 3.6 | 160963 | Growth Funds | -31.96% | 0.00% | 2.28% |
ASG | 7.5 | 47921 | Growth Funds | -10.09% | 6.64% | 1.79% |
CSQ | 2.6 | 138345 | Income & Pref Stk | -10.08% | 8.80% | 1.93% |
MCN | 2.4 | 63414 | Opt Arb/Opt Strat | -11.60% | 8.70% | 1.31% |
MSP | 2.4 | 51893 | Opt Arb/Opt Strat | -12.81% | 8.73% | 0.98% |
ETW | 3.9 | 163695 | Opt Arb/Opt Strat | -12.73% | 10.69% | 1.09% |
JLA | 4.0 | 147332 | Opt Arb/Opt Strat | -10.88% | 9.33% | 1.00% |
JPG | 5.8 | 177787 | Opt Arb/Opt Strat | -10.60% | 8.65% | 0.98% |
JPZ | 5.8 | 172363 | Opt Arb/Opt Strat | -9.89% | 9.06% | 0.98% |
ETB | 5.9 | 168106 | Opt Arb/Opt Strat | -10.13% | 9.57% | 1.12% |
ETV | 6.2 | 150471 | Opt Arb/Opt Strat | -10.57% | 10.26% | 1.07% |
EOI | 6.3 | 122146 | Opt Arb/Opt Strat | -11.99% | 9.94% | 1.15% |
ETJ | 6.4 | 139948 | Opt Arb/Opt Strat | -14.74% | 12.05% | 1.07% |
ETY | 6.4 | 121146 | Opt Arb/Opt Strat | -12.67% | 11.72% | 1.07% |
EOS | 7.1 | 117048 | Opt Arb/Opt Strat | -10.75% | 9.97% | 1.13% |
PEO | 2.5 | 55683 | Sector Equity | -13.49% | 11.11% | 0.64% |
GRX | 3.4 | 49822 | Sector Equity | -15.38% | 9.36% | 2.11% |
BTF | 3.6 | 34174 | Value Funds | -18.59% | 0.00% | 2.12% |
From this list there are several funds that can be mapped to a Morningstar style box and added to an investment portfolio at a discount. CET offers mid-cap blend exposure at a discount. ZF offers large cap growth exposure at a discount. PEO offers large cap value at a discount. ADX and NZG are both large cap blend funds trading at a discount. Each of these funds trades at a discount, and issues a sizeable distribution. Though these five funds have higher expenses than ETFs in their style boxes, the distributions paid by these CEFs will liberate value from being consumed by higher fees over time. Their distributions enable their discounts to overwhelm their higher fees.
Moreover, this list features many funds which generate income through option writing strategies. These option strategy funds hold a host of large cap stocks and write options on them. Option writing strategies are an attractive way to diversify an income portfolio, and these funds are even more interesting given the discounts on their holdings.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
