5 Closed-End Funds Offering Instant Value
Most investors have never heard of Central Securities Corp. (NYSE: CET). The investment firm was launched on Oct. 1, 1929, just weeks before an epic stock market crash — but it survived that era and has made it intact for more than 80 years, albeit in a low-key fashion.
#-ad_banner-#Rather than offer a range of mutual funds, CET offers just one closed-end fund. Yet it’s the kind of fund that investors should always seek out: The stated value of its holdings is worth a lot more than the actual trading price.
Said another way, this closed-end fund owns $28.20 a share worth of assets, but trades for less than $24.
CET has a solid portfolio, holding companies such as Intel (Nasdaq: INTC), Citigroup (NYSE: C) and the Bank of New York Mellon (NYSE: BK). The management fee is 0.77%, which is tolerable when you consider the $4-a-share discount to net asset value (NAV).
And this isn’t the only fund trading at a greater than 10% discount to NAV. I’ve dug through the Morningstar database, weeding out closed-end funds that hold little appeal, and found a few more of the discount-to-NAV gems.
| 1. Ellsworth Fund (NYSE: ECF ) |
NAV: $10.49 Recent Price: $8.81 Discount to NAV: 16%
This fund offers two forms of value. It trades at a double-digit discount to NAV, and thanks its focus on convertible securities, the fund also offers a roughly 3% dividend yield.
According to its sponsor, Dinsmore Capital Management, the fund has more than half of its money invested in cash-pay convertible bonds, another 8% in mandatory convertible issues, 12% in convertible preferred stock, and the remainder in common stock.
In light of the large gap to NAV, Dinsmore is in the midst of a buyback program. That makes sense. The best investment this firm can make these days is in its own closed-end fund.
| 2. Neuberger Berman Real Estate (NYSE: NRO ) |
NAV: $5.97 Recent Price: $5.03 Discount to NAV: 15.7%
This fund also trades at a 15% discount to NAV, but offers a more robust 5% dividend yield.
That $0.24-a-share annual payout has been in place for three straight years, but investors shouldn’t anticipate the solid yield to grow much in coming years. Offsetting that solid yield is an onerous 2.1% expense ratio. Still, this is a quality fund, holding stakes in a broad range of real estate investment trusts.
| 3. RMR Real Estate Income Fund Common (NYSE: RIF ) |
NAV: $23.23 Recent Price: $19.85 Discount to NAV: 15.5%
Of all the discount-to-NAV funds you’ll find, this one may have the most appeal for dividend-seeking investors. The payout has been rising at a fast pace, from $0.50 a share in 2010 to $1.32 a share in 2013, good for a 7.5% yield. While this fund owns some preferred stocks, common stocks of real estate firms account for the bulk of the portfolio, and many of those stocks have been delivering great dividend growth.
To be sure, the real estate sector may not be able to deliver such robust dividend growth in the future, but current payouts appear stable, and with this fund sporting such a solid gap to NAV, investors have a nice catalyst in place for further upside.
| 4. Nuveen Long/Short Commodity Total Return Fund (NYSE: CTF ) |
NAV: $18.62 Recent Price: $15.72 Discount to NAV: 15.5%
This fund generates income by trading options contracts on commodity futures. Though it has some exposure to rising or falling commodity prices, the main focus of the fund is to capture the spreads between monthly commodity contracts as they get rolled over.
To be sure, profits (and payouts) can fluctuate. The fund had a long history of paying out $0.155 a share in dividends every month, though in recent months, that figure has slipped to $0.135. Still, on an annualized basis, that works out to be a double-digit yield, and when coupled with that NAV gap, could pave the way for a 25% total return.
Risks to Consider: It can take some time for closed-end fund discounts to narrow, so patience is needed. Moreover, mutual funds such as these tend to carry higher expense ratios than exchange-traded funds (ETFs).
Action to Take –> It is never fully clear why such large gaps develop. But when they do, the sponsoring firms should seize the initiative by buying back shares, as is the case at the Ellsworth Fund. That can help magnify returns when the discount to NAV eventually closes.
Investments like these bargain funds are perfect for what my colleague Amy Calistri calls the “Dividend Trifecta” strategy. Simply put, it’s a three-part approach to dividends that multiplies the effectiveness of every dollar you invest. Follow this link to learn more…