While reports have surfaced in recent weeks of incredibly wide discounts on closed-end funds that signal undue risk, rather than buying opportunities, some financial advisers say that with a little homework, there are, actually, some wise buys to be had on closed-end funds, Dow Jones reports. Further, with most closed-end funds paying dividends, that is yet another strong case for considering such funds.
When people see that they actually calculate the discount on a closed-end fund, I think they believe this must be the scratch and dent sale on portfolios, that something has to be wrong, said Jeff Tjornehoj, senior research analyst with Lipper. Nothing could be further from the truth.
Many closed-end funds resemble the funds you might hold in your 401(k), but you know exactly how much of a discount you are getting, so that you can take advantage of other peoples panic.
Especially now, with the market so volatile, having the transparency of a discount is a big plus for closed-end funds, said Jerry Paul, of Quixote Capital Management. Because you can see the size of the discount, you get to see how big of a sale there is right now, and that makes the buying case pretty clear, Paul said.
In addition, with discount spreads so high on so many closed-end funds, its likely some activist investors might force such funds to open, at which time investors would realize immediate gains.
That said, investors need to find out how leveraged the closed-end fund is and what, exactly, it is invested in; its mandate may be in issues that are out of favor.