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Value investors should check different markets and financial instruments to find the best available deals. Closed-End funds (CEFs for short) trading at a discount to net asset value (NAV, the net value of fund holdings) are a source of potentially attractive investment ideas. 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 prices 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.

Below is a table of CEFs with discounts of more than 10%, dividend yields over 2%, and expense ratios lower than 1.5%:

Closed-End Fund (Ticker)

Strategy

Discount

Expense Ratio

Dividend Yield

Canadian Gen Invmnts Ltd (CGI.TO)

Developed Market

-30.21%

1.30%

5.17%

Central Securities Corp (CET)

Core Funds

-18.21%

0.71%

4.96%

Tri-Continental Corp (TY)

Core Funds

-14.42%

0.59%

2.99%

Eaton Vance TxMgdGlDvEIn (EXG)

Opt Arb/Opt Strat

-14.18%

1.05%

12.00%

Swiss Helvetia Fund (SWZ)

Developed Market

-13.93%

1.32%

12.18%

Royce Focus Trust (FUND)

Core Funds

-13.78%

1.33%

5.95%

Eaton Vance T-M D-E Inc (ETY)

Opt Arb/Opt Strat

-13.74%

1.07%

11.41%

Adams Express Company (ADX)

Core Funds

-13.57%

0.55%

5.73%

Ellsworth Fund Ltd (ECF)

Convertible Secs

-13.53%

1.10%

3.39%

Bancroft Fund Ltd (BCV)

Convertible Secs

-13.32%

1.10%

3.26%

Royce Micro-Cap Trust (RMT)

Core Funds

-13.23%

1.12%

5.50%

Royce Value Trust (RVT)

Core Funds

-12.92%

0.98%

5.81%

Eaton Vance R-Mgd Eq Inc (ETJ)

Opt Arb/Opt Strat

-12.60%

1.09%

11.37%

Eaton Vance Tx-Mg Gl B-W (ETW)

Opt Arb/Opt Strat

-12.38%

1.08%

10.61%

Petroleum & Resources (PEO)

Sector Equity

-12.28%

0.56%

7.51%

Virtus Total Return (DCA)

Global

-12.03%

1.38%

4.54%

Eaton Vance Enh Eq Inc (EOI)

Opt Arb/Opt Strat

-11.81%

1.15%

9.60%

Zweig Total Return (ZTR)

Income & Pref Stk

-11.80%

0.88%

9.64%

Morg Stan Asia-Pacific (APF)

Developed Market

-11.34%

1.24%

8.02%

New Germany Fund (GF)

Developed Market

-11.23%

1.09%

3.75%

Eaton Vance Enh Eq Inc 2 (EOS)

Opt Arb/Opt Strat

-11.09%

1.14%

9.69%

Madison Str Sect Prem (MSP)

Opt Arb/Opt Strat

-10.93%

0.98%

8.69%

First Tr Enh Equity Inc (FFA)

Opt Arb/Opt Strat

-10.83%

1.22%

7.37%

Liberty All-Star Equity (USA)

Core Funds

-10.81%

1.05%

6.63%

Templeton Dragon Fund (TDF)

Emerging Markets

-10.75%

1.37%

6.19%

AGIC Eqty & Conv Income (NIE)

Convertible Secs

-10.74%

1.08%

6.41%

Gabelli Div & Inc Tr (GDV)

Value Funds

-10.67%

1.40%

5.66%

Zweig Fund (ZF)

Core Funds

-10.37%

1.06%

8.70%

Turkish Investment Fund (TKF)

Emerging Markets

-10.33%

1.05%

2.04%

Latin American Discovery (LDF)

Emerging Markets

-10.17%

1.39%

3.12%

Western Asset/Cly IL S&I (WIA)

Corp Debt BBB Rtd

-10.17%

0.68%

3.52%

Eagle Capital Growth (GRF)

Core Funds

-10.11%

1.42%

15.20%

Eaton Vance T-M B-W Opps (ETV)

Opt Arb/Opt Strat

-10.01%

1.09%

10.22%

Central Europe & Russia (CEE)

Emerging Markets

-10.00%

1.11%

7.45%

There does not appear to be any clear relationship between dividend yield, market/NAV discount, and expense ratio:

The take-away lesson from this plot is that there does not seem to be a downside for selecting lower fees, higher dividends, and enormous discounts. One of these is not necessarily obtained by giving up another.

Further research is required to determine if the fund's underlying holdings are worth an investment. Here are flavors of the five most discounted funds:

Canadian General Investments invests in a blend of developed market securities and trades at a significant discount to the value of its portfolio holdings. Similarly, Central Securities also invests in developed market securities with a strong focus in the United States. Its holdings are midcap blend.

Many of Eaton Vance's funds (EXG, ETJ, ETY, ETW, EOI, EOS, and ETV) hold a host of large cap stocks and writes 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.

The list goes on, and each of these discounted funds is a candidate for additional research. As prudent investors, you must check fund holdings and strategies before investing.

Many investors complain about how some of these funds distribute a larger dividend than their holdings provide, which forces the fund to make up this difference by selling fund assets. Actually, this is desirable for good news for investors who purchased closed-end funds at significant discounts to NAV. If held in tax-advantaged accounts, these funds will payout investors at their market values after investors purchased them at a discount. Instead of complaining, investors should be praising this liquidation at higher prices than those they paid.

Please read the article disclaimer.

Source: 10% Sale On Closed-End Dividend Funds