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Closed End Funds - Best of Times, Worst Of Times

Posted: Feb 26, 2009 13:42 PM by Eric Fox

Tickers in this Article: DNP, GAB, BDT, FF, RTU

There are several equity closed end funds classified in the value category that are trading substantially below its historical net asset value (NAV), giving investors the opportunity to buy into these entities at large discounts to the market value of the assets held.

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What Are They?
Closed end funds are not that well known to investors, but essentially they are investment companies that issue a fixed number of shares to investors, and then trade either on or off a major exchange at a value established by the market. This market established value could vary anywhere from a premium to a discount to the net assets in the fund. (Learn more in Open Your Eyes To Closed-End Funds and 20 Investments: Closed-End Investment Fund.)

Two Value Funds
The Gabelli Equity Trust (NYSE:GAB) trades at a discount to NAV of 12%, compared to its 10 year average premium of 5.082%. The fund invests not just in common stock, but preferred stock, convertibles and warrants.

BlackRock Strategic Dividend Achievers Trust (NYSE:BDT) trades at a discount to NAV of 18.94%. The fund invests in small and mid cap stocks, and had 35% of its assets in financials as of December 31, 2008. The fund doesn’t have a 10 year history yet, but the discount has been widening ever since it started up several years ago.

Double Benefit
This situation may create a double benefit for investors as well. If the managers of these funds are doing their jobs correctly, and not style drifting, then these funds already hold stocks selling below its true value, which is the credo of value investing. An investor will then see gains once the discount gravitates back to its historical mean, and also when the market recognizes the true value of the stocks held in the portfolio.

Although these two may seem inexpensive relative to its assets, there are several other closed end funds with a much wider discount. The First Opportunity Fund (NYSE:FF) is run by the storied Wellington Management Company LLC, and trades at a discount of 31.28% to NAV. The fund is a sector fund that invests in financials, and its 10 year average discount to NAV is only 6.084%.

The Cohen & Steers REIT & Utility Income Fund Inc. (NYSE:RTU) is trading at a discount of 27.16%. Its 5 year average discount is 12.878%. The fund objective is to invest 80% of its assets in real estate investment trusts (REIT) and utility stocks.

Big Daddy
The largest equity closed end fund that I could locate was the DNP Select Income Fund (NYSE:DNP), with a market capitalization of $1.6 billion. The fund looks for current income and long-term growth of income in its investments. This fund trades at a premium of 19.6%, right in line with its 10 year average.

It is typical for many closed end funds to trade at a discount to NAV, yet that discount has widened recently to an average of 14% at the start of 2009. The 10 year average discount for all closed end funds is 4%.

Many closed end funds are seeing their discount to NAV widen relative to historical ranges as demand for the shares weaken. Investors should start paying attention to these investment companies as they position portfolios for the expected recovery in the economy and the markets.

Learn how to evaluate these types of investments, read Uncovering Closed-End Funds.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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