At CEFA, we consider three important details when doing a primary review of a closed-end fund (CEF), whether it is currently in one of our client portfolios or being considered as part of a portfolio in the future. We track almost 70 data points per week per U.S.-listed CEF with "CEFA's Closed-End Fund Universe Report" (CEFU). The key areas we suggest investors or investment professionals monitor are the following: Entry Point Risk, Dividend Risk and NAV Performance.
1. Entry Point Risk - The NAV vs. Market Price for a CEF
We find it is important to not only understand the current discount or premium (disc/prm) on an absolute basis (amount + or - from zero), but also compare the disc/prm to itself historically and to its peers. CEFA uses a 90 day relative discount or the current disc/prm vs. the previous 90 day average disc/prm. We also compare funds on the 1 year z-statistic, which is the current disc/prm vs. the 52 week average disc/prm then divided by the volatility (or standard deviation) of the discount. A third relative measure of a disc/prem would be the discount range, essentially plotting the current disc/prm as a percentage between the 52 week disc high and low. The goal for these data points is to help determine if a fund is currently over or under priced.
Entry Point Risk - Rules of Thumb
- We generally like an absolute discount over an absolute premium, but recommend one reviews Dividend Risk and NAV Performance closely before simply buying a dividend yield or deep discount.
- Having a negative 90 Day Relative Discount means buying a fund at a lower than average discount. This is often a good place to buy into a fund, as long as it has positive fundamentals, but again, we suggest you have an understanding of
