11/27/12 – Closed-End Marketplace Revisited

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Nov 27, 2012 5:30:11 AM

and tagged Market Updates, Economics Lessons

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Guest post from Peter Essele, senior investment research analyst

On November 13, I wrote about the richness of the closed-end marketplace due to strong investor demand. At the time, I mentioned that approximately 60 percent of taxable closed-end funds were trading at a premium to net asset value (premiums occur when the price paid in the open market for a particular fund is greater than the value of the underlying securities), which was the highest level ever recorded. In addition, the post stated that, based on historical relationships in this market, these aberrations often don’t persist for extended periods of time. My goal was to highlight the current dislocations that existed and to warn investors regarding a possible correction. Two days later, the number of funds trading at a premium in this particular market went from approximately 60 percent to less than 20 percent, as investors shed these securities at an aggressive pace. In some cases, investors lost more than 6 percent in a matter of days from securities that they believed to be high-yielding “bond” funds.

Since the short-term sell-off, the market has rebounded nicely, and approximately 55 percent of the market is now trading at a premium. It appears opportunistic investors stepped in to pick off securities that were selling at a discount to NAV, which helped prices return close to where they were before the sell-off.

Remember, the closed-end marketplace is prone to quick corrections that often catch investors flatfooted. When investing in this space, we recommend that you do so prudently with small allocations to a particular area.

Percentage of Taxable Bond Closed-End Funds Trading at a Premium

Source: Bloomberg, Commonwealth Investment Research

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