Seeking Alpha

Stifel team a fan of bond CEFs trading at big discounts

  • Closed-end bond funds had a good October - up 1.89% on a per-share basis while NAV grew 1.96%. This means, however, the sizable discount to NAV for the group of 6.04% failed to budge from a month earlier.
  • "The materially large discounts represents an opportunity for investors to reduce risk," says Stifel's Alexander Reiss and Thomas Boyes. The boost an investor gets when buying a CEF at a discount is what they term the Discount Yield Benefit (DYB), and - among other things - it can make the net cost of owning a CEF cheaper than traditional lower-cost options like passively-managed index funds.
  • Current favorites of the team are: ERC, MCR, MMT, and FT, all of which trade at discounts to NAV of about 12%.
  • Senior loan funds have remained more popular (possibly a danger, according to this analysis) and trade at an average discount of just 3.61%. The team's favorites are FCT, PPR, and VVR.
Comments (1)
  • There are 2 major reasons why some CEF's trade at a discount.
    A liquidity discount occurs when funds are too small to attract institutional investors. And if a fund has a large capital gain tax liability, current holders fear paying taxes on gains they didn't get while holding the fund.
    4 Nov 2013, 01:39 PM Reply Like
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