The volatile market is scaring some investors and causing them to pull out of funds, but there are some buying opportunities in closed-end funds that aggressive investors might want to look into, according to Dow Jones.Some closed-end-funds are trading at large discounts to their net asset values. Whereas mutual funds and exchange-traded-funds issue any number of shares, closed-end-funds only offer a set number of shares.
Usually, closed-end-funds trade at a small discount to the NAV. However, in the last few weeks the gap has widened. The median discount for all closed-end funds was 6.5% on Aug. 20, according to Lipper, wider than the 4% median discount June 29.
Several funds are trading at such high discounts that industry observers believe it makes them buying candidates for aggressive investors looking for ways to make gains with the unstable market.
The areas of opportunities may be among funds that invest in foreign stocks and bonds, municipal bonds and dividend-paying stocks. Up until a few months ago, some of those funds were trading at a premium.
The Morgan Stanley Global Opportunity Bond Fund is currently trading at a 10.2% discount to the value of the assets in its portfolio, commented Thomas Herzfeld, a Miami-based money manager, who invests in closed-end funds. The funds share price has dropped about 39% since its peak in February, but its NAV is down only about 3%, Herzfeld said.
Also, some small closed-end funds may be prime for possible liquidation or merger activity with regular open-end funds that don’t trade on an exchange. When an incident such as that occurs, it can provide an instant windfall for investors because the liquidation would have to be done at NAV, which is higher than the current share price of the fund.
“Small funds with large discounts generally don’t have long lives ahead of them,” Herzfeld said.
Muni-bond funds might also have potential buying opportunities, as they are not directly impacted by the woes of the mortgage market. Also, some analysts are advising investors to look at buying financial stocks, including banks, as they are currently cheaper than they were a few months ago.
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