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January, 2019

CLOSED-END FUNDS SELLING AT WORTHWHILE DISCOUNTS
by LARRY

Value investing pioneer Benjamin Graham suggested that reasonable total returns may be had from the purchase of assets selling for less than their per share net asset values. Because of their greater risk, for individual stocks one might want a higher margin of safety, for instance ones selling for no more than two-thirds of their appraisal after subtracting all debt. Overall, however, closed-end funds are less subject to loss of principal and so when selling for simply lower than their average discount to net asset value they tend to be good investments. Exceptions can be ones that use a lot of leverage, holding stocks bought with significant amounts of debt.


A closed-end fund (or CEF) is merely a kind of mutual fund offering the investor a pool of investments under management, as with open-end funds, yet with a fixed number of shares, so prices per share rise and fall depending on demand, as with shares of common stocks. Market forces, then, can result in both premiums and discounts relative to net asset value. Graham would have wanted to sell holdings which had achieved significant price premiums over their real values, while, everything else being equal, finding attractive CEFs that were sporting large discounts. Here would be fruitful stalking grounds for the bargain hunter.

For a long-term, income oriented investor, an interesting benefit of buying CEFs is that their dividends (if any) are higher, relative to share cost, when there is a substantial discount to net asset value. A CEF that offers a 3.00% annual yield, for instance, actually pays the investor who buys shares at a 20% discount 3.75% a year in dividends. (In this example, an investor with $10,000 [after a commission] can buy $12,500 worth of net asset value in a CEF that has a 20% discount [for .8 times $12,500 = $10,000, and a 3.00% dividend on $12,500 = $375 or 3.75% of $10,000].



Since the market as a whole is significantly lower than a few months ago, we might expect now to find a few closed-end funds that offer nice discounts. In fact, comparing market prices with net asset values, the six assets in the table are all found to have discounts of 10% or more and appear promising as investments at current levels.


CEFs Selling at 90% or Less Their Net Asset Value
FundTicker
Symbol		Recent
Price		Discount
Central and Europe Fund, Inc.CEE$23.7014.17%
Japan Smaller Capitalization FundJOF$8.6014.67%
Mexico FundMXF$14.1913.57%
Source Capital, Inc.SOR$33.6913.55%
Templeton Emerging Markets Fund, Inc.EMF$13.8010.93%


Since each of these CEFs is now available at a better than average discount to net asset value, in my view the group as a whole has an excellent chance of attaining higher than usual total returns over the next few years, thus for the patient investor potentially doubling one's investments by around 2025, whereas their collective total return has averaged 9.10% a year for the previous decade (a price gain plus dividends rate that normally would see them double in about 8 years).

Making selections such as in the above table is of course but a first step in deciding on securities that are appropriate for one's own portfolio. An investor is best served determining his or her overall goals of investing, then with what level of risk he or she is comfortable, and what strategy seems best to achieve desired ends. Closed-end funds such as these may fit into one's approach and, if so, might be looked at in terms of growth, income, safety, and underlying value.



Good luck in your own investment decisions and in sticking with a successful long-term plan for achieving rewarding money management goals.


DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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