Back in early 2006, my Foolish colleague Rick Munarriz introduced the concept of investing in closed-end funds at a discount to net asset value (NAV). Thesetwo articles provide all the additional background you could desire. The key concept here is that closed-end funds, unlike standard open-end mutual funds, trade in the secondary market, opening up the possibility of a divergence between a fund share's price and its value.
If you've been dreaming of buying a mutual fund on sale, well, you might need to get out more. Nevertheless, you're in luck, because closed-end funds afford exactly such an opportunity.
Take Rick's example of Tri-Continental
Here are today's six steepest discounts on closed-end funds with more than $100 million in assets:
|
Fund |
Asset Class |
Discount to NAV |
10-Year Average Discount |
10-Year NAV Annualized Return |
|---|---|---|---|---|
|
Morgan Stanley China A Share Fund |
Pacific ex Japan |
(21.8%) |
N/A |
N/A |
|
China
Fund |
Pacific ex Japan |
(17%) |
(7.7%) |
13.6% |
|
Greater China Fund |
Pacific ex Japan |
(15.3%) |
(14%) |
9.4% |
|
DWS Global Commodities Fund |
Sector equity |
(14.7%) |
N/A |
N/A |
|
Swiss Helvetia Fund |
Western European |
(14.3%) |
(16.5%) |
10.5% |
|
ASA Limited |
Sector equity |
(14.2%) |
(8.7%) |
11.8% |
You might be shocked to see the preponderance of China funds here, in light of the country's monster stock returns. Indeed, Morgan Stanley's fund sports a year-to-date NAV gain of 71.7%. Who wouldn't want a piece of that action? Well, the skeptics are out in full force, and it appears that they are using this rare access to the exclusive A shares -- available to mainlanders and select qualified institutions -- to short China. That's right: You can short a closed-end fund. So the contrarians have opened up a chasm between the market price and the value of these funds -- if, that is, you believe the market valuations of the portfolio companies are fair. China reportedly sports a market P/E of about 50, so I'm less than eager to scoop up these "discounted" funds.
Since it's a relatively new fund, I can't say whether the DWS Global Commodities Fund warrants its relatively high 1.13% expense ratio. You can get similar exposure with a lower-expense iShares ETF, so the onus is on DWS to prove its value above and beyond a commodity index.
The best value today appears to be ASA Limited. The fund's expense ratio is nearly as low as that of the Gold Miners ETF
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Fool contributor Toby Shute doesn't own any of the funds mentioned or shares in any closed-end fund, but he's keeping an open mind. The Motley Fool has a disclosure policy.
