by Fred Fuld III
A closed-end fund is a type of investment fund that raises a fixed amount of money through an initial public offering (IPO) and then trades on a stock exchange like a regular stock. Unlike mutual funds, which allow investors to buy and sell shares directly from the fund only once a day at the market close, closed-end funds have a limited number of shares that investors buy and sell from each other on the open market, while the stock exchange is open.
Investing in closed-end funds (CEFs) that trade at a discount to their net asset value (NAV) can offer several potential benefits to investors. (The NAV in simple terms is what the value of the fund would be if all the holdings were sold off, any debts paid off, and the resulting amount divided by all the outstanding shares.)
When a CEF’s market price is lower than its NAV, each dollar invested effectively purchases more than a dollar’s worth of assets. This discrepancy can enhance the investor’s yield and provide opportunities for capital appreciation if the discount narrows over time.
Catalysts that can close that gap include:
• An increase in buyers at the market due to anticipated growth potential
• Activist investors trying to take over the fund and liquidate it
• Management converting the fund to a regular mutual fund
However, it’s essential to recognize that discounts can persist, and relying solely on the expectation of narrowing discounts may be risky. Therefore, a comprehensive evaluation of the fund’s fundamentals, management, and market conditions is crucial before investing.
The SRH Total Return Fund Inc. (STEW) is a non-diversified closed-end fund aiming for total return through a value-driven investment approach. Managed by Paralel Advisors LLC, with SRH Advisors, LLC as the sub-adviser, the fund employs a bottom-up strategy to identify quality businesses trading below their intrinsic value. This methodology seeks to uncover investment opportunities poised for attractive long-term returns.
As of February 15, 2025, STEW’s market price is $16.88, a 22% discount to its NAV. This 1.63 billion market cap fund has a trailing distribution rate or 3.4%, which may or may not continue in the future.
The Destra Multi-Alternative Fund (DMA) offers exposure to a diversified portfolio across various asset classes, including equities and fixed income. Managed by Pinhook Capital, LLC, the fund aims to provide growth and income by allocating assets dynamically in response to market conditions.
As of February 15, 2025, DMA’s market price is $8.56, a greater than 24% discount to NAV. The trailing distribution rate is 3.7% . The fund has an extremely low market cap of $76 million.
The Herzfeld Caribbean Basin Fund Inc. (CUBA) focuses on long-term capital appreciation by investing in companies poised to benefit from developments in the Caribbean Basin region. This includes investments in countries such as Cuba, Jamaica, and Mexico, as well as U.S.-based companies with significant operations in these areas.
As of February 15, 2025, CUBA’s market price is $2.42. For investors interested in geographic diversification and exposure to the Caribbean’s economic growth, CUBA presents an opportunity, particularly when trading at a 23% discount to its NAV. The fund has an extremely low market cap of $38 million. The trailing distribution rate is very high and may not continue at that rate in the future,
The GDL Fund (GDL) is a closed-end fund that primarily engages in merger arbitrage strategies, aiming to profit from the successful completion of corporate mergers and acquisitions. This approach involves investing in companies that are acquisition targets, seeking to capture the spread between the market price and the acquisition price.
As of February 15, 2025, GDL’s market price is $8.34. Investors looking for alternative investment strategies with the potential for steady returns may find GDL appealing, especially if it is available at a current 20% discount to its NAV.
In conclusion, investing in closed-end funds trading at a discount to their NAV can offer enhanced yields and potential capital appreciation. However, it’s essential to conduct thorough research and consider each fund’s investment strategy, management quality, and market conditions. Funds like STEW, DMA, CUBA, and GDL provide diverse opportunities across different sectors and strategies, allowing investors to tailor their portfolios to their specific investment goals and risk tolerances.
Disclosure: Author didn’t own any of the above at the time the article was written.
