Posted by: Aaron Pressman on April 6, 2007
I have a short story
(still behind the pay wall) in today’s magazine about the latest craze in closed-end funds, so-called dividend capture funds. Bottom line: They’re a solid option to add to a diversified mix of income-producing investments. There’s some fear that too many funds chasing the same strategy will hurt returns but that seems a long way off given that most of the stocks in these funds are highly liquid, large cap names.
Closed-end funds generally are an all-too-frequently overlooked corner of the investing world. Because they can trade at a discount or premium to net asset value, unlike regular mutual funds, they often provide an opportunity to buy $1 for 90 cents. They also encompass a variety of interesting and useful strategies far beyond the realm of mutual funds. I favor ETFConnect.com for fund info. Here are some useful tidbits I picked up this morning.
First and foremost, plenty of closed-end funds have outperformed the paltry 2%-ish return of the S&P 500. According to ETFConnect, 250 closed-end funds have year-to-date total returns over 2% out of 632 funds tracked. Some interesting folks at the very top, too.
The Boulder Growth & Income Fund (Symbol: BIF), a leveraged fund which invests in a wide assortment of income-producing securities, everything from shares of Anheuser-Busch (BUD) to U.K. Treasury bonds. The fund also owns many real estate investment trusts and other closed-end funds. A real potpourri. It’s paying monthly dividends of 11.5 cents a share, or an annualized yield of almost 11%. But the fund is also trading at a staggering 40% premium to its net asset value. The fund’s real yield is almost 15%. Insane. As recently as last July, the fund was trading at a discount so there’s a huge amount of downside risk here.
The next best performer is the MVC Capital Fund (MVC), which is basically a private equity fund for small and mid-size companies. It holds a mix of debt and equity securities and trades at a steep 17% premium. The fund used to trade at a perennial discount but has been at a premium consistently since early 2005. Almost 10% of the fund is in a single holding, Ohio Medical Corp. Other top performers among closed-end funds this year include the Malaysia Fund (MF), the Morgan Stanley Global Opportunity Bond Fund (MGB) and the PIMCO Strategic Global Government Fund (RCS).
The fund screening tool at ETFConnect lets you scan for all manner of other ideas. The Mexico Fund is trading at a 16% discount to the value of its assets despite a 10-year annual return of 15%. A number of utility, REIT and convertible bonds funds are also hanging out in the discount sale aisle.
Other sources of info about closed-end funds include Roger Nusbaum’s blog, the Quant Investor blog, and of course Technorati’s latest results on the topic. I also liked the Closed-end funds blog but it hasn’t been updated since last October. Now if only Tom Herzfeld started blogging…