This week we explore Close End Funds (CEFs). CEFs are mutual funds that trade on stock exchanges, unlike popular open-ended funds. Open-ended funds are bought and sold through the fund manager. As such, its price always equals its net asset value (NAV). Because CEFs trade in stock markets are often priced at a premium or discount to their NAV. While liquidity is often lacking in many CEFs, they can allow an investor to buy a fund at a discounted price versus the aggregate value of its holdings.
The scan seeks CEFs that predominately hold energy MLPs. The four funds that met our criteria are trading at steep discounts compared to the years before the pandemic. Continued economic normalization should result in a reduction of the discount, which will benefit performance. Further, the funds offer leverage which boosts their distribution rates.
We caution that these funds can be illiquid. As such, the bid-offer spread is often wider than what is typical with most stocks and can impede returns. Additionally, the discount to NAV can move quickly, resulting in better or worse performance than an equivalent open-ended fund or individual MLPs.
The screen and data are courtesy of CEF Connect- Nuveen Closed-End Funds.
- Sector = CEF MLP
- Leverage <20%
- Discount to NAV < -10%
- Distribution rate >5%
Our screen returned four funds, as shown below. FIF has a distribution rate slightly below 5%, but we decided to share it anyway. The Z-score statistically quantifies how the discount compares to prior periods. A Z-score of +/-1 is one standard deviation above or below the average for a given period.
The summaries below are unique compared to how we traditionally highlight selections. The first graphic for each fund shows the five-year histories of the fund’s premium or discount to its NAV. The second table highlights the top holdings. As you will note, the funds hold similar MLPs.
This report is not a recommendation to buy or sell the named securities. We intend to elicit ideas about stocks meeting specific criteria and investment themes. Please read our disclosures carefully and do your own research before investing.
Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research.