Ninety-percent of closed-end funds are trading at discounts, some as high as 15% to 35% of their net asset values, a marked spread from their 4.4% average since 1997, The Wall Street Journal reports. And the spreads appear not only to be lasting longer, but to be growing larger.
Whereas in other market conditions, this might tempt investors to grab closed-end fund shares, their high exposure to debt instrumentstwo-thirds of closed-end funds focus on such debt as mortgages, corporate and foreign debthas investors running for the hills. In addition, about 72% of closed-end funds use leverage.
With the detrimental effects of debt and leverage combined, some closed-end funds are down as much as 42% for the past year.
With such high debt exposure and leverage, and poor performance,
There may be a good reason that a particular fund is trading at a wider discount than another fund, according to Citigroup research; the quality of many closed-end funds may be poor, in light of current market conditions.
My career specializing in closed-end funds spans almost five decades, and it has been over 30 years since I have seen discounts at such wide levels sustained for days on end, according to closed-end fund consultant Thomas J. Herzfeld.