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The Coronavirus And Closed-End Funds

Mar. 02, 2020 3:40 AM ETBUI, AGD, ERH, EVN, GUT, PCQ, UTG27 Comments
Michael Foster profile picture
Michael Foster


  • CEF discounts have exploded from 2.8% to 7.5% on average in the last week.
  • Those bigger discounts aren't evenly disbursed, with some funds seeing more aggressive selloffs than others despite very similar NAV performance.
  • This is a rare buying opportunity for 7.3% dividends and diversification into non-equity assets through CEFs.

The coronavirus has caused a tremendous selloff in all markets, and CEFs have not been immune. But since many CEFs invest in assets that are very tangentially related to coronavirus risks as they currently appear, this means there are many income opportunities for investors who act fast.

Perhaps most astounding is just how sharply discounts turned. The average CEF discount was 2.8% on the close of trading February 21st, and that average discount fell to 7.5% as of the close of trading February 28th. Since the long-term average discount for CEFs is more around the 4% range, we can say that funds went from overbought to oversold very quickly when looking at the aggregate numbers - although this is exacerbated by some extreme cases.

For instance, the Delaware Investments Dividend & Income Fund (DDF) saw its astounding 40% premium crater to a 14.6% premium in a matter of days. As the third-highest priced CEF on a premium to NAV basis, this was unsurprising.

This means on a price basis, DDF amplified the S&P 500’s losses by a considerable margin, demonstrating the risks of holding CEFs trading at a high premium.

Not all premium-priced CEFs saw such a sharp nosedive. The most expensive CEF, the Gabelli Utility Trust (GUT), saw its over 50% premium barely move by the end of the week, staying over 50%:

GUT’s price decline closely followed that of the index, indicating the sell-off was more driven by a NAV erosion than market panic.

This is surprising considering the defensiveness of both CEF investors and utilities investors, but it is not replicated everywhere. On the 21st, utilities CEFs had a 4.9% average premium to NAV versus a 1.5% discount on the 28th, but this is in large part the result of a steeper decline in

This article was written by

Michael Foster profile picture
After receiving my Ph.D. in 2008, I quickly became disenchanted with the demands of academia. That got me focused on early retirement and how high yield vehicles can get me to financial independence quickly. I was able to leave my professorship after two years and focus on my own investments. However, writing my thoughts on stocks, bonds, and alternative investments attracted the attention of a few institutional investors and I quickly took on a new career as an independent research analyst. Nowadays I divide my time between writing on stocks/funds and investing my own assets in high yield funds.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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