Closed-End Funds at a Discount

06/11/2019 5:00 am EST

Focus: STRATEGIES

George Putnam

Editor, The Turnaround Letter

Most closed end funds (“CEFs”)  trade at a discount to NAV, and in some cases, at substantial discounts of 15%-20%, explains George Putnam, editor of The Turnaround Letter.

This benefits investors in several ways: the discount can shrink (providing extra returns), they can buy the fund’s income stream at a reduced price, and they can re-invest any distributions at the discounted price, in effect putting a dollar to work at a cost of perhaps 85 cents.

Moreover, sometimes activist investors will push for the liquidation of a closed end fund, which would reduce its discount to nearly zero. Below are some CEFs with large discounts to NAV that we think are worth a look.

Some of the yields appear high, and so potential investors will want to be aware that the yield is based on all distributions, including dividends and capital gains (and some CEF’s even return the investors’ capital to them in the form of dividends). 

Adams Diversified Equity (ADX)

Based in Baltimore, the respected Adams Funds family, founded in 1929, has two entrants on our list due to their high discounts and high quality. The Adams Diversified Equity fund holds a roster of 93 large-cap U.S. equities, with a bias toward tech and growth stocks. 

Microsoft (MSFT), Amazon (AMZN), Apple (AAPL) and Visa (V) currently comprise about 15% of its assets.  Its capable management, growth orientation and low .56% expense ratio have boosted returns to above the S&P500 index in recent years.

 The fund has a minimum annual distribution of 6%, which includes dividends and capital gains (and possibly a return of capital), providing a regular flow of cash to investors.

Adams Natural Resources (PEO)

The Adams Natural Resources fund focuses primarily on energy companies. ExxonMobil (XOM), Chevron (CVX) and EOG Resources (EOG) currently comprise over 35% of its assets. The fund also holds 54 other companies across the energy services, refining, chemical, packaging and metals/mining industries.

Performance has been a struggle in recent years with the volatile energy prices.  Expenses are a reasonable .79%, and the fund carries the firm’s commitment to a minimum 6% annual distribution rate.

Boulder Growth and Income Fund (BIF)

This fund holds a highly concentrated portfolio of 15 value-oriented large-cap equities, along with a small amount of other non-cash securities. Berkshire Hathaway (BRK.B) — at 33% weight — JPMorgan (JPM), Cisco (CSCO), Yum Brands (YUM) and Caterpillar (CAT) comprise nearly 60% of assets.

Investment performance has been weak compared to the S&P500, partly explained by the fund's high 13% cash holdings. With the sizeable discount to NAV, the fund occasionally repurchases its shares, including buying in about 0.7% of its shares in the first quarter.

Central Securities Corporation (CET)

Founded in 1929, this old-school fund has nearly a quarter of its assets invested in a 23% stake in privately held Plymouth Rock Company, a diversified property and casualty insurance company in the upper East Coast.

This investment appears to be successful, given its $170 million current value compared to its $0.7 million cost. The balance of the holdings are well-known large-cap U.S. companies like Intel (INTC), Analog Devices (ADI) and Motorola Solutions (MSI).

Share turnover is very low, at an 8% rate last year. Expenses are also low at 0.69%. CET pays a steady dividend, and its returns have been healthy compared to the overall market.

General American Investors (GAM)

Venerable GAM, established in 1927, holds a diversified portfolio of well-known U.S. stocks, led by TJX Companies (TJX), Microsoft and waste services company Republic Services (RSG).

The fund is authorized to repurchase shares any time the NAV discount reaches at least 8%, which allowed it to buy-in over $41 million of shares last year at a 16% discount. The 1.2% expense ratio is a bit high, and near-term returns have lagged.  However, the long-term cumulative investment return, including dividends and other distributions, has been impressive.

Royce Global Value Trust (RGT)

Managed by value investing legend Chuck Royce and his highly regarded Royce & Associates, this fund focuses on small and mid-cap value stocks around the world. It is highly diversified, holding nearly 200 stocks, with about 90% of its assets in developed market equities.

RGT has a somewhat elevated 1.7% expense ratio, yet part of this may be due to its small size. Potential investors should be aware of RGT’s volatile performance, reflected in a -18% return last year following a 36% gain the prior year.

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