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Charles Sizemore
Charles Sizemore
Articles (507)  | Author's Website |

Closed-End Funds Are a Pocket of Value in an Expensive Market

A basket of CEF with deep discounts

October 22, 2015 | About:

The third-quarter market correction came like a kick to the teeth. But if you blinked, you might have missed it. From August 17 to August 25 – a span of a little less than a week – the S&P 500 dropped a quick 11%. But by the middle of October, the market had already recovered more than half of the late-summer swoon.

In certain sectors – like energy – the August selloff created the sort of pricing that makes value investors like me salivate. I scooped up additional shares of Enterprise Products Partners (EPD), Energy Transfer Equity (ETE) and Teekay Corp (TK), among others, in myDividend Growth portfolio. Pricing is still very favorable in this sector, and I expect more gains to come.

But in the broader market, the correction – while violent and jarring – was not deep enough to really give us the bargains I had hoped for. U.S. stocks are still very pricey, trading at acyclically-adjusted price/earnings ratio of 25, implying extremely lackluster returns going forward.

So, mainstream stocks are a bad bet at today’s prices. But there are bargains to be found for those willing to look.

One corner of the market that is dirt cheap right is closed-end bond funds (“CEFs”). This is a niche market that is mostly ignored by institutional investors and even seems a little anachronistic in the age of index-tracking ETFs. But their quirkiness is precisely what makes them appealing. Unlike mutual funds – which are priced daily at NAV – or ETF shares – which rarely deviate too far from their NAV – CEFs are often priced at wild discounts and premiums to the values of their respective portfolios.

When a CEF is priced at premium to its book value, you generally don’t want to own it. Why would you pay $1.10 for a dollar’s worth of assets? An enterprising investor could look at the fund’s holdings and replicate them by buying the same bonds on the open market… without paying management fees.

But when a CEF trades at a discount…that’s where it gets interesting. In several high-quality CEFs, we can essentially pick up dollars for 90 cents or less.

Select Closed-End Fund Valuations

Fund Ticker Yield Current Prem/Disc to NAV 52-Week High Prem/Disc to NAV 52-Week Low Prem/Disc to NAV
Cohen & Steers Select Preferred & Inc PSF 8.72% (11.12%) (2.04%) (11.12%)
Cohen & Steers REIT & Preferred RNP 8.38% (16.66%) (9.50%) (17.83%)
EV Limited Duration Income EVV 9.52% (14.70%) (8.70%) (16.03%)
Cohen & Steers Select Preferred & Inc LDP 8.32% (10.18%) (5.86%) (11.83%)

In the Dividend Growth portfolio, I currently own shares of the Cohen & Steers Select Preferred and Income Fund (PSF), the Cohen & Steers REIT and Preferred Fund (RNP), theEaton Vance Limited Duration Income (EVV) and the Cohen & Steers Limited Duration Preferred & Income Fund (LDP). All are trading at discounts to book value of 10%-17% — some of the deepest discounts since the 2008 meltdown – and all pay very competitive dividends of 8%-10%.

Between the dividends and a closing of the discounts to more “normal” levels, I expect to see total returns of 15%-20% over the next 12-18 months. In an overpriced market, that’s not too shabby.

Disclosures: Currently long EPD, ETE, TK, PSF, EVV, RNP, LDP

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the chief investment officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.

Visit Charles Sizemore's Website

Rating: 5.0/5 (1 vote)



J3ff3r premium member - 2 years ago

I have a stack of Canadian CEFs and they don't disappoint.

Of course, as usual we need to read and study their prospectus, but discounted on NAV CEFs are good opportunities. And since they are in disfavor vs the more mainstream ETFs, it is a good way to avoid the markets pundits.

Thanks for the article.

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