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The phenomenon of closed-end funds getting cheaper at the year-end and rebounding is another type of January effect that is well known but not without risk; it is well known and yet it continues to exist. Part of the reason may be that the lack of liquidity keeps any hedge fund and bank trading desk from taking advantage of it. I know that there are funds that engage in closed-end fund trading strategies but there always seems to be room at year-end for this one to work.

I've been buying fixed income closed-end funds at a cheap, but by no means unprecedented, 13-15% discount to NAV (Net Asset Value) this year-end. The cheapness usually disappears with the changing of my calendar to a new year and that is when I take profits. I will exit this trade based only on the cheapness of the funds to NAV. I risk the bond market falling (interest rates going up) or the bond portfolios underlying the closed-end funds collapsing for some other reason such as credit concerns or a liquidity crisis, just as we have seen this past quarter. And while they carry bonds that are greater than normal because some funds are leveraged, they also carry  yields from four to seven percent that are nicely at or above the Fed Funds rate.

So what did I buy this week? Here is the list of four municipal bond funds and one taxable income fund.

  • Nuveen Maryland Dividend Advantage Municipal Fund 3 (NWI) ($12.27)
  • BLACKROCK MUNIYIELD (MCA) ($12.50)
  • Neuberger Berman Intermediate Municipal Fund Inc. (NBH) ($12.55)
  • Investment Grade Municipal Income Fund (PPM) ($12.70)
  • Evergreen Multi-Sector Income Fund (ERC) ($15.63)

I'm still searching around for more.

Disclosure: I own and bought every closed end fund mentioned above. I may buy more. I will likely sell in the first quarter next year or if the discounts on the flunds close to less than 7% before then.

Source: Year-End Selling Trade: Closed End Funds At Big Discounts