Discounted Underdogs Packing a Punch
Eight years since the last bear market in any assets but commodities, there aren’t many investment bargains left.
Closed-end funds priced well below their net asset value (NAV) are among the few remaining blue-light specials.
Such discounts tend to narrow by the end of a fund’s life. Behavioral economist Richard Thaler, who’s just won the Nobel Prize, has done a lot of research on the closed-end fund discounts to NAV as a prime example of market inefficiencies.
Of course, large discounts can persist or even widen. But paying 90 cents on the dollar for a decent and respectably performing portfolio, managed at a reasonable cost and paying a decent distribution rate, all in a bullish trend, is seldom a ticket to the poorhouse. Here are a few to consider.
The $1.7 billion Adams Diversified Equity Fund (ADX) has been around since 1929 and invests almost exclusively in U.S. mega-caps without using leverage. Apple (NSDQ: AAPL), Alphabet (NSDQ: GOOG), Microsoft (NSDQ: MSFT), Facebook (NSDQ: FB) and Amazon (NSDQ: AMZN) accounted for more than 16% of the portfolio at midyear.
ADX has matched the S&P 500 over the last five, 10 and 15 years but was up 21% vs. 14% for the S&P 500 in the first nine months of 2017. It continues to trade at a 14% discount to NAV. The expense ratio is a reasonable 0.64%.
The fund is committed to distributing 6% of its average market price at month-end over the last year, with most of that coming in December. Last year it distributed 6.4% of the current market price.
If the mega-cap end of the market seems a little too well liked and aggressively bid at the moment, there’s the $400 million Royce Micro Cap Trust (RMT), investing in stocks with a capitalization below $1 billion. RMT was up 22% in the first nine months of the year but trades at a NAV discount of 11%.
The fund uses 10% leverage and has a 1.26% expense ratio. Over the past year it distributed 6.9% of the current price in nearly equal quarterly installments.
The $393 million Japan Smaller Capitalization Fund (JOF) is up a strong 29% year-to-date through Sept. 30, but continues to trade at a discount of nearly 12% to its net asset value. It uses no leverage and has a 1.09% expense ratio.
The Nomura-managed fund makes a single annual distribution in December. Last year it distributed 7.4% of the current market price.
Japan stocks, of course, have struggled for years before the relatively recent turnaround. Equities involved in commodity production suffered through a shorter but still vicious bear market once the China growth story soured in 2014.
Despite a 26% return last year and a 13% gain in the first nine months of 2017, the $983 million BlackRock Resources and Commodities Strategy Trust (BCX) remained slightly in the red over the trailing five-year span. It trades at a 12% discount that actually represents a tangible improvement over recent years.
The expense ratio is 1.08%. BCX has distributed 6.5% of its current market price in nearly equal quarterly installments over the past year.