Closed-end muni funds currently "on sale"...

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Closed-end muni funds currently "on sale"...

Post by longview » Thu Aug 29, 2013 12:57 pm

People are talking about closed-end muni funds selling at a discount to NAV. The latest edition of Random Walk also talked about the benefits of buying closed-end funds that are selling at a discount.

Short question: Why would anyone sell a fund at a discount to NAV? Selling a set of munis at an 8% discount to NAV? Is NAV not actually the net asset value? :confused

Is this a liquidity premium? If you are holding the closed-end fund until maturity -- doesn't the deep discount more than make up for any lost opportunity to trade-up to better munis?

Is there a good resource to learn more about the ins/outs of closed-end funds?

Thanks for any and all info.
(To color my comments: my situation is ER trying to make a large portfolio that is 99% taxable last 45 years)

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Re: Closed-end muni funds currently "on sale"...

Post by psteinx » Thu Aug 29, 2013 1:34 pm

Closed End Funds have come up as a topic on this forum before, most recently about two weeks ago.

It's a broad topic, including the question of discounts.

A CEF selling at a non-trivial discount to NAV is not some kind of flaw in efficient markets, nor is it necessarily a free lunch for investors. Rather, as an investor in such a CEF, you cannot generally take ready advantage of the discount (i.e. by, say, demanding that the fund redeem your shares at NAV). And as a buy and hold investment, a discounted CEF may be considerably WORSE than a comparable low cost ETF or OEF (i.e. In particular if the expenses of the CEF are high.)

If fund management were always looking out for the best interests of investors, they would be quicker to take various measures (buy backs, tenders, liquidation, merger with an OEF) to reduce the discount, when such a discount is wide and persistent. But, among other things, that would reduce assets under management, and generally reduce fee revenue to the managers.

If investors were well informed and pro-active, they would be quicker to force these actions themselves (voting in board members and activists who would pro-actively reduce discounts). But CEF owner/investors are often passive and it can be difficult and/or expensive for an activist to unlock the value discrepency between NAV and a discounted market price.

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Re: Closed-end muni funds currently "on sale"...

Post by grabiner » Thu Aug 29, 2013 9:46 pm

Here's an example with the math worked out.

A fund has one million shares and $100M in assets. These assets are bonds which have a 5% yield. However, the fund has a 1% expense ratio, so each shareholder receives only $4 per share in dividends, not $5. Since investors could buy individual bonds worth $80 to get $4, they may only be willing to pay $80 for a share of the closed-end fund, creating a 20% discount. (The discount won't usually be quite this large; investors are paying for the benefits of the fund's management, and there is always the chance that the fund will decide to liquidate, paying $100 per share to the shareholders.)
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Re: Closed-end muni funds currently "on sale"...

Post by bberris » Fri Aug 30, 2013 6:01 am

I can't recall any activist attack on muni funds. Probably because they have only had the large discounts you see today for brief periods. In any case, organizing shareholders to attack a fund is easier said than done and is usually done by pros with large positions.

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Re: Closed-end muni funds currently "on sale"...

Post by zzcooper123 » Fri Aug 30, 2013 6:58 am

Isn't Tax loss harvesting or re-balancing back into municipal bonds funds the same as buying a discounted NAV? Didn't I just buy a higher non-taxable revenue stream at a discounted price?
Muni bonds seem to have periodic "Crises" that can be exploited.

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Re: Closed-end muni funds currently "on sale"...

Post by nedsaid » Sun Sep 01, 2013 10:30 am

There was a closed end funds expert that was a Market Monitor on Nightly Business Report. As I recall, he would come on late in the year and recommend buying some closed end funds at a discount. He would recommend to sell these later on as these discounts closed. It seemed that some of this had to do with selling late in the year for tax purposes. It was a very predictable cycle in the markets.

It has been so many years that my memory banks are foggy on this issue. Does anyone remember this guy?

I owned a closed end mutual fund once. It was Global Health and run by a well known Invesco fund manager. The manager later left when he got caught front running for his own account against the mutual funds he managed. I sold at a loss and called it "Global Disaster." I don't know if the fund even exists anymore.

I think this is a fertile area for investment. It would be worth some time and effort looking into this. After getting burned on Global Health, I lost interest in these investments.

My foggy memory banks recall that some of the closed end muni-funds take extra risk to compensate for their fees. I also recall the use of leverage. Sounded to risky to me for what should be "safe" investments. Fat yields but extra risk.

Do your due diligence before buying.
A fool and his money are good for business.

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