Fear, Greed, Discounts, Premiums and the World of CEFs

 |  Includes: CUBA, DHG, FOF, SNF
by: M F

An economics professor and a grad student are walking along the sidewalk, and the grad student spots a twenty dollar bill on the sidewalk. He says, “Hey professor, look, a twenty dollar bill.” The professor says, “Nonsense. If there were a twenty dollar bill on the street, someone would have picked it up already.” They walk past, and a little kid walking behind them pockets the bill.

If anyone you know is an efficient market proponent, all you have to do is point them to the closed-end fund space. Fear and greed play out in that arena as discounts and premiums (to NAV). Currently, there are a few opportunities popping up that are interesting.

  • ETF Connect has a great feature that lets you sort by discount and premium.
  • The Herzfeld Carribean Basin Fund (NASDAQ:CUBA) continues to trade at a large premium +40%, but finding any shares to short could be problematic.
  • DWS Dreman Value Income Hedge Fund (NYSE:DHG) is managed by one of the best names in the business, but was getting pummeled to a worse than -20% discount and seems to have settled to around -10%. It is a l/s fund that is about 30% leveraged, and has a higher management fee of 1.42%
  • The Spain Fund (NYSE:SNF) is a Spanish CEF that trades at a 20%+ premium. A simple strategy would be to short SNF and buy the Spain ETF (ETFs rarely trade away from their NAV).
  • The Spain CEF highlights a characteristic you want to see when searching for CEFs at discounts/premiums; the price oscillates around the NAV on both the positive and negative side (some funds chronically trade at a discount with no catalyst for closing that gap). James Altucher has some good coverage of closed-end fund arb in one of his recent books (Supercash), and also touches on a CEF portfolio for his Mom at Stockpickr. SNF has traded at over 100% premiums and greater than -20% discounts. Take note of the five-year period in the 90s when it traded at a constant discount.

    Chen & Steers Closed End Opportunity Fund (NYSE:FOF) is interesting since it has a fund of funds model to invest in other closed end funds. This could be a great option for someone looking to buy a diversified portfolio. It holds 94 other funds, many of which are trading at discounts. In effect, you get a double-dip on the discount effect (and also a double dip on management fees which tally to ~ 2%). Currently it is at a ~ -3% discount, and if that ever gets larger, the fund could be an interesting option.

    Brett Arends has a good article on TheStreet.com about some other CEF's that are particularly attractive. He has another article out on an emerging debt fund trading at a discount that results in a 12% dividend yield.

    Below is a table I whipped together of some various CEFs. The bottom section is some of the bigger buy-write funds. Data is from 8/27 close.