Most investors who have been in the markets for more than the past decade knew about mutual funds long before they knew much about exchange traded funds (ETFs). While most mutual funds are open-ended, with unlimited potential sizes, the class of closed-end mutual funds has a set size when it comes on the market. Unlike traditional mutual funds and ETFs, they often trade at discounts or premiums to the net asset value (NAV).
With so many value investors out there, many of them get very interested when they see stocks and funds that are trading at a discount to what they are really worth. There are sometimes good reasons behind why some funds trade at a discount to the NAV. There are also some obvious reasons that many trade at a premium to their NAV.
24/7 Wall St. recently was able to find some research from Bank of America Merrill Lynch that highlighted some of the top closed-end funds (CEF) covering bonds or fixed income with solid dividend yields that were trading at deep discounts to their NAV. Some of the prices have changed slightly, as have some of the discounts. To account for some of the changes, 24/7 Wall St. also included the stated discount to NAV that was registered at the Closed-End Fund Association website.
One key thing that Merrill Lynch did here was to break out the current discount by comparing each CEF’s historical average discounts. The firm also had Buy ratings on all of these as well. The hope is that some of the discounts are already pricing in some of the impact that will be seen when the Federal Reserve ultimately raises interest rates in 2015 or 2016. These discounts also act as a solid yield-booster as well to what are already above-average yields.
When investors buy bond funds, they are generally looking for two issues: stability and yield. These all offer solid dividend yields, but stability is going to be in the eye of the beholder here. After all, they got to trade at a discount to the NAV somehow.
24/7 Wall St. also only picked the funds out of the much larger report that had a combination of stronger dividend yields or better discounts versus the historic average discounts. Out of the 43 CEFs covered in this report, we narrowed these down to roughly 10 funds before going into detail here. These CEFs include some tax-free yielding municipal funds (see part two of this report), senior loan CEFs, high-yield funds and even an emerging market debt CEF.
Senior Loan CEFs
Voya Prime Rate Trust (NYSE: PPR) trades near $5.45, has a 52-week trading range of $5.15 to $5.79 and a yield of roughly 6.4%. The Merrill Lynch stated discount to NAV was -7.8%, versus its three-year average of -1.7%. The CEFA discount to NAV was also shown to be -7.8%, and the fund has roughly $880 million in assets.
Nuveen Floating Rate Income Fund (NYSE: JFR) currently trades around $10.99, has a 52-week range of $10.44 to $12.11 and comes with a yield of 6.6%. Merrill Lynch showed a discount to NAV of -9.5%, versus a three-year average discount of -3.5%. The CEFA discount was shown as -9.6%, and the fund has nearly $680 million in assets.
High-Yield Bond CEFs (Junk Bonds)
Western Asset High Income Opportunity Fund Inc. (NYSE: HIO) was at $5.23, with a 52-week range of $5.18 to $6.13 and a yield of 8.1%. Its discount to NAV was -12.8% per Merrill Lynch’s data, versus a three-year average discount of -5.0%. The CEFA discount to NAV was even wider at -13.18%, and this junk bond fund has just over $500 million in total assets.
Emerging Market Debt CEFs
Morgan Stanley Emerging Markets Domestic Debt Fund Inc. (NYSE: EDD) trades at $8.86, has a 52-week range of $8.73 to $13.57 and has a stated yield of 9.9%. This one is currently trading at a discount to NAV of -14.5%, compared to a three-year average of -10.7%. The CEFA site shows an even wider discount of -14.8%, and the fund has some $736 million in total assets. Just keep in mind that annual NAV has fallen by almost 26% over the past year.
Multi-Sector Fixed Income CEFs
PIMCO Dynamic Credit Income Fund (NYSE: PCI) trades at $20.34, has a 52-week range of $20.18 to $24.07 and comes with a 9.2% yield. Merrill Lynch showed a discount to NAV of -12.0%, versus a historic discount to NAV average of -6.6%. The CEFA discount to NAV was shown as -12.16%. This fund has a very large asset base of almost $3.2 billion.
AllianceBernstein Global High Income Fund (NYSE: AWF) trades at $12.02, has a 52-week range of $11.92 to $14.39 and comes with a yield of 8.1%. Its discount to NAV was shown to be -12.8%, versus a historic average discount of only -3.1%. CEFA showed a discount to NAV of -12.82%, and the fund has roughly $1.21 billion in assets.
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