Wednesday, January 21, 2009

Closed-End Funds Take It On the Chin

Midway through 2008, we looked at the closed-end funds that trade at the highest discounts to their net assets. But the discounts we saw then pale in comparison to the discounts we see now. Consider the largest discounts according to The Closed-End Fund Association (CEFA) now vs 6 months ago:

We also saw that near the end of 2008, the median discount for closed-end funds rose dramatically, so the rise in discounts we see in the table above shouldn't come as a large surprise.

Of course, this doesn't mean these funds are automatic buys. While investors may appreciate the fact that they can buy assets for a discount in the form of closed-end funds, they should always do their homework (i.e. read the fund's quarterly reports) to ensure they understand what they are buying. For example, if fund holdings are out of date (due to declines in market value) or illiquid, the book value may not be an accurate assessment of the value of the fund's underlying holdings.

So how would you have done had you owned these heavily discounted closed-end funds through the market turmoil that took place in the latter half of 2008? We'll explore that in a future post.

1 comment:

CanadianInvestor said...

Am very interested in CEFs that hold income trusts, also way down. Looks like potential opportunity indeed.