By Yaser Anwar, CSC of Equity Investment Ideas
I’ve compiled a list of closed-end funds selling at a discount that you should consider. Besides looking for funds selling below NAV, I looked for companies which have are rated at least 4/5 from Morningstar, have a good 3 year track record, and have share prices that have done well in 07.
Please be cognizant that the average CEF trades less than 50K shares on a daily basis, but 2/3 presented in here trade above 100K and 1, which I felt was good enough to mention, trades 97K.
1) Cohen & Steers Select Utility Fund (UTF)
4-star rating with Morningstar’s above average return and risk profile. Dividend Yield: 4.5% Discount to NAV approximately 13%. Expense Ratio: 1.28%
Sharpe Ratio: Vanguard Total Mkt Idx (VTSAX) 1.17 | Cohen & Steers Select Utility (UTF) 2.21 (the higher the, the better)
Beta: S&P 1 | UTF 0.21
Volume: 149K daily (average 3 month)
Total Shares Outstanding x Closing NAV: 43.32 x 32.64= $1,414 million
TSO x Closing Price: 43.32 x 28.19= $1,221 million
Total Net Assets= $1,799 million
Why the discount? The only reason I can think of is due to the 31% leverage the mutual fund employs. Besides that, this is a fund to own, as the chart below illustrates.
I checked if UTF underperformed the market in 07 but it has done pretty well, up 13%+ so far. So we’ve got a double digit performer with lower risk than the market and consistent three year performance selling at a discount.
The chart is the best out of all three presented in this analysis, click here to see it.
2) DWS RREEF Real Estate Fund II (SRO)
4-star rating with Morningstar’s above average return and risk profile. Dividend Yield: 8%, Discount to NAV approximately 11.5%. Expense Ratio: 1.05%
Sharpe Ratio: Vanguard Total Mkt Idx (VTSAX) 1.17 | DWS Real Estate II (SRO) 1.66
Beta: S&P 1 | SRO 1.23
Volume: 143K daily (average 3 month)
Total Shares Outstanding x Closing NAV: 38.5 million x $21.76= $838 million
TSO x Closing Price: 38.5 x 19.35= $745 million
Total Net Assets: $1,213 million
Why the discount? Similar to UTF, the reason I believe is due to the 28% leverage it employs. Also, the volatility of SRO is .23% higher than the S&P, 1.23.
I checked whether SRO underperformed in 07, so far it has been up 7.9%. Given the 8% yield, consistent distributions and discounted valuation, I believe this fund should be considered if you’re looking for yield and playing one of the hottest sectors, REITS.
Click here to check out the chart (forming a double bottom).
3) Western Asset Emerging Markets Debt (ESD)
4-star rating with Morningstar’s above average return and risk profile. Dividend Yield: 6.7%, Discount to NAV approximately 13%. Expense Ratio: 1.02%
Sharpe Ratio: VTSAX 1.17 | ESD 1.98
Beta: S&P 1 | ESD 0.14
Volume: 98K (traded 140K on latest close, avg. 3 month)
Total Shares Outstanding x Closing NAV: 28 million x 21= $588 million
TSO x Closing Price: 28 x 18.39= $515 million
Total Net Assets: $602 million
Why the discount? In my opinion it’s due to the risk of being categorized as an emerging market fund. So far this year SRO has been up about 4.35%, has three year returns of 13%, which are not bad given it’s low volatility.
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