On Oct. 13, 2008 I posted a message here "closed-end fund are selling at big discounts". Looking at the closed-end fund section in the current (Oct 12, 2009) Barron's, many funds have astonishing 52-week market returns:
There are 55 funds with 52-week returns exceeding 100%. Looking at the market price of a closed-end-fund alongside its NAV, for example
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, I seethat the market prices of some closed end funds are much more volatilethan the net asset values, and that big discounts to NAV can presentopportunities. I don't see such big opportunities now but plan tomonitor CEFs going forward. (Background -- closed end funds (CEFs) differ from the more common open-end funds the fund sponsors do not redeem shares at net asset value (NAV), so funds can trade at significant premiums or discounts to NAV.)
OK, but wouldn't PFF be a garden variety open end preferred fund similar to PFD, yet looks lots better on this graph?
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also include RPV which oddly seems to track PFD's good performance,yet is a more traditional big cap value fund. And PGF, which has beenpreferred-on-steroids since the bottom for obvious reasons. Or if youwant to think of preferred as a bond fund, see HYG which took quitesmall hit yet is spewing a high yield around 10%. Just food for brainstorming; not sure if these candidates that I have been using to claw my way out of the March lows are interesting compares to what you listed. I thought the greater diversity of open end funds might let you meet your goals easier than finding a rare underpriced CEF that happens to. A little harder to research now that etfconnect.com has disappeared. (for selfish reasons I omit mention of a favorite etf that I want to buy more of monday)
CEFs aren't usually on my radar because of what you're describing - they have a layer of price volatility, based on supply/demand for the CEF, on top of the volatility of the underlying investments. There isn't much confidence in the price you'll get when it comes time to sell. Last October was an extreme example of that, and there was another in December.
Actually, if you plug in some tickers I think you'll see that 10/10/08 was one of those off-the charts days for volatility, the market itself had gone haywire. How haywire? One of the few issues I keep an eye on had _intra day__ returns of over 30%. Not a misprint - the gap between the low and high trades was 30%. So 52-week data this week is a window onto illiquidity during last year's credit crisis.
But here's the rub: it was hard to do much buying because even small trades moved the price beyond what would be acceptable for a normal trade. The big discounts to NAV didn't last long, added up it might be days or weeks for many of them. A small number of CEF owners bought at those prices, but most simply saw their market price plummet, and then rebound. You can get a sense of this by viewing "volume by price" data. The WSJ charting area lets you do that, as do many other sites. Only a tiny percentage of transactions happened at those depressed prices.
To generalize this: my belief is that a very patient trader can keep an eye on these backwaters of the financial markets and find opportunities that larger investors can't exploit. Of course, they don't come at this magnitude very often. But the basic principle applies...look at illiquid markets and buy when it looks like everyone's selling, and vice versa. You need to have your homework done already on the security itself though. And it's so sporadic I'd hardly call it a "core investment strategy," more something to consider for chip-shots now and then.
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