pageok
pageok
pageok
Crazy Action in Closed-End Mutual Funds:

Closed-end mutual funds, which have a fixed number of shares and are traded on stock markets, have been absolutely clobbered by the turmoil in the financial markets. Not only have their underlying net asset values gone done, but many of them are trading at historically high discounts to net asset value. There are even some municipal bond funds that normally trade at premiums that are currently trading at 25% or so discounts (in part because they are leveraged, but still, a 25% discount on a fund that will likely eventually regress to its historical mean of a small premium leaves a lot of room for error).

I'm not a fortune teller, so I don't know whether this is a good time to invest or not. But I do know that if I owned an open-end fund, especially if I had a tax loss I could take, I'd be shopping around for a similar closed-end fund with a massive, historically unprecedented discount. For example, why own an open-end emerging markets income fund when you can own EDD at a 32% discount? (Disclosure: I don't own this fund.) Why own an open-end corporate bond fund when a couple dozen closed-end corporate bond funds are selling at >25% discounts? And so on.

Two good websites for closed-end funds: www.cefa.com and www.etfconnect.com.

Related Posts (on one page):

  1. Closed-End Funds Update:
  2. Closed-End Funds and Panic Selling:
  3. Crazy Action in Closed-End Mutual Funds:
Mac (mail):
When you or anyone else figures out where interest rates are going, would you please let me know? Lower, short term, but over the next 1 to 3 years?

Thanks in advance, if you are right, of course.
10.8.2008 1:11am
Crunchy Frog:
...and the winner of next year's Super Bowl, while we're at it.
10.8.2008 2:26am
A. Zarkov (mail):
Closed end funds generally start off selling for a premium over their NAV, which becomes a discount as time goes on. So don't expect that to close if the market recovers. Of course the market won't recover because it's still priced to high according to Tobin's Q. We have a ways to go yet, just like real estate.
10.8.2008 3:36am
Alex R:
The NAVs of open-end mutual funds are at least policed by the marketplace -- in the typical fund, a shareholder can take out money at any time and receive the NAV for his/her shares. But, especially given the opacity of the current markets, how much can we really trust the stated NAVs for closed-end funds? Maybe those 30% discounts would really turn out to be premiums if the assets had to be sold in the current market...
10.8.2008 8:35am
DavidBernstein (mail):
Alex R.: Some funds selling at unusually high discounts have a plain vanilla portfolio of publicly traded stocks. No worries about valuation there.
10.8.2008 9:37am
ed (mail) (www):
Hmmmm.

Frankly I'd be very careful of municipal bonds and municipal bond funds. There are a lot of municipalities in America with vastly underfunded pension and healthcare liabilities for retired unionized workers that are going to be absolutely clobbered by the free falling housing prices and the resultant property tax base decreases.

I'm not sure the municipal bond ratings have included these underfunded liabilities in their ratings since municipalities haven't been required to include them in their balance sheets until this year.
10.8.2008 10:58am
Spitzer:
David: Interesting post about a possible arbitrage opportunity (assuming like to like exchange is perfect between specific open and closed funds, which it never is). Raises the fundamental question, though: is the gap new, and, has the size of the gap changed during the past few years? (I know ETFs are a relatively new phenom, with the notable exception of SPDRs, but some historical perspective would seem to be important to any analysis of the present situation).
10.8.2008 12:03pm
Dan Simon (mail) (www):
This might help explain things...
10.8.2008 2:34pm
American Psikhushka (mail):
David Bernstein-

Some funds selling at unusually high discounts have a plain vanilla portfolio of publicly traded stocks. No worries about valuation there.

Valuation is still a concern with plain vanilla publicly traded stocks. Up until several weeks ago the major invesment banks were "plain vanilla publicly traded stocks". Disregard this comment if you were being sarcastic.

Spitzer-

Raises the fundamental question, though: is the gap new, and, has the size of the gap changed during the past few years?

In normal market conditions discounts to NAV of over 12-15% are pretty rare. So these discounts are unusually high. There may be some profit potential in some cases, but you would have to do your own analysis and be very careful.

(I know ETFs are a relatively new phenom, with the notable exception of SPDRs, but some historical perspective would seem to be important to any analysis of the present situation).

ETFs for the various commodities, sectors, and indexes are relatively new - generally started within the last decade or so. But exchange-traded closed-end funds have been around for a while, at least since the 60-70's, probably much longer.
10.9.2008 7:11am
DavidBernstein (mail):
AP, valuation in terms of accuracy of the stated NAV, not whether the NAV itself is going to go up or down.
10.9.2008 10:06am
Mike Friedman (mail) (www):
I did some checking...

Most of the Closed End Funds only report their NAVs as of 8/31 but their discounts are calculated based on their present price.

I'll bet that the current price of their assets is a lot less than the price was on 8/31.
10.11.2008 2:31am