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An Update on Closed-End Funds

Closed-end funds are funds with a fixed number of shares outstanding and, as a result, trade more like a share of common stock than their open-end fund cousins which trade at their net asset value (“NAV”). Shares of closed-end funds can trade at a price that is either a discount or a premium to their net asset value based upon market demand. This condition can often lead to much greater volatility and price dispersion for closed-end funds when compared to open-end funds.    For example, according to the Stifel Nicolaus October 2009 Closed-End Funds Monthly Review report, closed-end funds have traded at an average discount to their NAV of 4.52% over the last ten-year period.

The historic market downturn of 2008, and early 2009, brought the average discount of closed-end funds to as high as 11.35% at the beginning of 2009. This created some very interesting valued oriented opportunities for investors looking to take advantage of these deep discounts. The performance of the closed-end fund marketplace reflects this heightened investor demand as, according again to the Stifel Nicolaus October 2009 Closed-End Funds Monthly Review report, the average year-to-date price return for all closed-end funds was 36.60%, the average year-to-date NAV return for all closed-end funds was 25.58% and the average discount level has returned to a more historically typical level of 4.66%.

We, at Hennion & Walsh, believe that the current average discount level of closed-end funds may increase as investors look to implement year-end tax selling strategies. This belief does not mean that all investors should start flooding to closed-end funds for these reasons alone as closed-end funds contain their own unique set of risks, as previously discussed, and may not be appropriate for all investors or the best available investment security type for all asset classes or sectors.

Securities offered through Hennion & Walsh, Inc. Member FINRA, SIPC

 

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