Back in the fall of 2008, virtually every equity-focused
mutual fund
was falling in value. The selloff was most keenly felt in many
closed-end funds (CEFs). Not only did these funds see their
portfolio of investments drop in value, but the fund price dropped
even more, well below the
Net Asset Value
(
NAV
) of those fallen holdings. Of course, the subsequent market
rebound that began in the spring of 2009 saw the flip side of that
trade. Not only did these funds benefit from a rebound in the value
of their holdings, but the funds closed that discount by catching
up to the (rising) NAV.
We at StreetAuthority have written about this phenomenon several
times before. Most recently,
Amy Calistri
told you how
she locked in
an 8.7%yield -- and made a double digit gain -- in a matter of
days. [Amy brings great ideas like this to her
Daily Paycheck
readers each month.]
Well, it's happened again. The market swoon that began on July 22
has pushed many closed-end funds lower, down to a level that is
well below their (reduced) NAV. As the market snaps back, these
funds can benefit from both a portfolio rebound, and a closing of
the NAV gap. Here are five closed-end funds that are trading at
hefty discounts to NAV, all of which could outperform the pack when
the market rebounds.
1. Boulder Growth & Income (NYSE:
BIF
)
Discount to NAV
: -21%
This fund is a no-brainer. Roughly one-quarter of its value ($55
million) is tied up in
Berkshire Hathaway (NYSE:
BRK-A
) (NYSE:
BRK-B
)
, and another $40 million is held in
Johnson & Johnson (NYSE:
JNJ
)
,
Wal-Mart (NYSE:
WMT
)
and
Cohen & Steers Infrastructure Fund (NYSE:
UTF
)
. Along with those collective $95 million stakes, another $86
million is tied up in a range of other U.S. blue chip stocks. The
fund has a total of $181 in solid investments, yet the fund is
valued at just $143 million. This is like getting $38 million in
quality stocks for free. Looked at another way, the fund's holdings
could lose 20% of their value and still be worth more than the
share price of this closed-end fund. Morningstar gives a five-star
rating, likely due to the fund's conservative approach to
investing.
2. Boulder Total Return Fund (NYSE:
BTF
)
Discount to NAV: -21.5%
This sister fund to the one noted above takes an even more
concentrated approach to blue chips: Berkshire Hathaway,
Yum Brands (NYSE:
YUM
)
, Walmart and JNJ account for more than 70% of assets. The key
difference can be found in
dividend
policies. The Boulder Growth Income fund has temporarily suspended
its dividend but may look to reinstate it when the market improves,
whereas the Total Return Fund solely aims to garner as much
capital appreciation
as possible.
3. Gabelli Healthcare & Wellness Trust (NYSE:
GRX
)
Discount to NAV: -19%
This fund has only been around since 2007 but has generated
positive returns every year since -- nomean feat when you consider
the market rout of 2008. In fact, the fund saw its NAV rise a hefty
31% in the 12 months ended June 30, but the market pullback in late
July put an end to this, and NAV has slumped anew in recent
sessions to a recent $8.24. This is well above the fund's recent
price of $6.70. The fund's holdings are evenly split among consumer
defensive stocks and traditional healthcare stocks.
To be sure, this fund has always traded at a wide discount to NAV,
and is due for more attention from Mario Gabelli's eponymous firm.
The firm could look to use excess capital to buy backshares of the
fund while they remain so cheap, or they could liquidate the while
fund and investors would score a quick 19% return (selling costs
notwithstanding).
4. Thai Fund (NYSE:
TTF
)
Discount to NAV: -17%
Looking to invest in Thailand? Yeah, I hadn't given it much thought
either. Investor attention has been focused elsewhere in Asia, in
countries like China, Indonesia and Vietnam. But anyone who has
visited the region will tell you that Thailand has built out an
impressive infrastructure and is increasingly an export base for
many multinational firms, especially in the auto industry. Thailand
had recently been dogged by domestic infighting that scared off
tourists and foreign investors, but a recently-elected prime
minster appears to have brought stability.
This four-star ranked fund, run by Morgan Stanley, focuses on
large, established Thai blue chip firms, most notably in consumer
cyclical, financial services,
real estate
and industrials. Exposure to fast-growing
emerging markets
is essential in a time when Japan, Europe and the United States are
facing limited long-term growth prospects, making this an ideal
holding.
5. Royce Value Trust (NYSE:
RVT
)
Discount to NAV: -17.5%
If you're looking for exposure to small caps and micro-caps, then
Royce is your best bet. This firm has a team of analysts that
continually uncover value in areas of the market where few others
tread. The Royce Value Trust is a favorite of the analysts at
Morningstar: "There is little we don't like about this fund. It has
a well-regarded
portfolio manager
, sponsor firm, and investment approach. We also find it to be
highly shareholder-friendly, as best exemplified by its
management-fee structure."
Those words are cold comfort for investors that held the fund while
the market was slumping, as small caps and micro-caps took it
especially hard.
Shares
had been trading above the $15 mark all spring, but have since
plunged closer to $12. This is handily below the $14.64 NAV.
Small doesn't
mean
risky for Royce. The holdings in this fund are well-established
firms that simply lack the heft to be considered mid-caps or
large-caps. One quibble: the fund has stakes in 521 separate
companies, which is probably more than necessary to garner a truly
diversified portfolio (by about 490 or so). At least this helps
avoid blow-ups from any one stock. If you think micro-cap and
small-cap stocks will rebound, then this fund will give you extra
leverage
in order to close the gap.
Risk to Consider:
The NAV gaps for these funds may take a while to close, and
they may yet fall a bit further, but they provide added upside over
the long haul, especially if any of them get liquidated by the
sponsor.
Action to Take -->
This strategy of buying CEFs at a discount is a tried-and-true
strategy that could pay off substantially when the market rebounds.
And as my friend Amy Calistri mentioned recently, websites like
CEFConnect.com
and Morningstar are good resources for finding funds trading at a
discount. Any of the funds I mention above are worth consideration
by investors.
-- David Sterman
The 10 Best Stocks to Hold Forever
One of these stock has plowed through 8 bear markets and has
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company is raising its dividends, spending billions to buy back its
own shares, making smart acquisitions, and is the dominant leader
in a $30 billion market. This is just one of the 10 best "Forever"
stocks to own today.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
