Photo credit: Owen Moore
In a world in which very little is cheap and most mainstream stocks and bonds offer little in the way of expected returns, closed-end funds have been a fantastic source of value. I’ve been writing about closed-end funds for the better part of a year (see Closed-End Bond Funds Near Their Deepest Discounts Since 2008) and I’ve been very pleased with their performance in an otherwise choppy, directionless market.
Yet I’ve noticed that some of the fantastic bargains I saw a year ago are starting to dry up. Or at least they’re not quite as juicy as they were. The 15% discounts to net asset value are now closer to about 10%.
Though it may simply be a case of me getting spoiled. By any historical standard, closed-end funds are still exceptionally well priced. Patrick Galley, manager of the Rivernorth DoubleLine Strategic Income Fund, gave his thoughts to Barron’s this past week. (See 4 Closed-End Funds Yielding Up to 9%):
Q: Closed-end fund discounts have come in a lot since the beginning of the year. Aren’t they getting less attractive in general?
A: Actually, closed-end fund discounts are still pretty attractive overall. In January and February they got so wide it was reminiscent of 2008. Fear was high and investors were dumping assets. Discounts got to the 98th percentile of the widest levels they’ve reached going back to 1996. They narrowed in March and April. Now they are at the 76th percentile of the widest levels.
The averages are very much skewed by the muni-bond sector. Munis have had a good run and everyone wants them. Investors are chasing those past returns. They aren’t even looking at discounts and premiums. Meanwhile, taxable fixed-income spreads are still wide. As the examples I gave you show, a lot of them are still double-digit discount opportunities.
76th percentile is nothing to complain about. Sure, it was a lot more fun buying them at 2008-caliber discounts. But that’s really not normal, and every buying opportunity can’t be that good. So for the time being, I’ll plan on maintaining a solid allocation to closed-end funds in my Dividend Growth portfolio. The portfolio is up 13.5% year to date, and closed-end funds have certainly played their part in achieving those returns.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.