Closed-end funds (CEFs) are similar to exchange-traded funds (ETF), except that instead of issuing and redeeming shares as needed, closed-end funds issue a fixed number of shares at the initial public offering. After that, closed-end fund shares trade on the open market just like stocks.
Closed-end funds have an advantage over exchange-traded funds because unlike exchange-traded funds, closed-end funds can use leverage (borrowed funds) to enhance returns. For instance, they might borrow at 2% to purchase bonds returning 4%. That’s why closed-end funds typically outperform exchange-traded funds focusing on the same market sector.
Premiums vs. discounts
Unlike conventional mutual funds and exchange-traded funds that trade close the value of their holdings (net asset value or NAV), closed end funds might trade more than (premium) or less than (discount) to their net asset values. That’s an important distinction because my research has found that closed-end funds trading at discounts typically outperform those trading at premiums. That said, in some instances, it’s worth paying up for performance.
Here are three closed-end funds that have racked up 39% to 60% total returns (price appreciation plus dividends) in the past 12 months.
Convertible bonds: High returns
Bancroft Funds (ticker BCV): A member of the Gabelli family, Bancroft mostly holds convertible bonds and preferred stocks issued by corporations that can be exchanged for common stock shares under certain conditions. That seems to be a profitable strategy. According to Morningstar, Bancroft has returned (share price appreciation plus dividends) has 50% for the past 12 months and averaged 26% annually for the past three years. Bancroft is currently paying a 32 cents per share quarterly dividend plus a large variable payout in December. Based on its last 12-months payouts, that equates to a 9.9% dividend yield. Bancroft recently traded at a 3% discount to its net asset value (NAV).
Micro caps: Hot category
Royce Micro-Cap Trust (RMT): Holds relatively small stocks (market-caps less than $2 billion), which is where the action is these days. Biggest holdings include Par Technology (ticker PAR), Mesa Laboratories (MLAB), AutoCanada (AOCIF) , nLight (LASR) and Magnite (MGNI). Royce has returned 81% over the past 12 months and averaged 16% annually over the past three years. Pays 16 cents per-share quarterly dividends, which equates to a 5.2% yield. Royce recently traded at an 11% discount to its NAV.
Stocks and bonds
Virtus AllianzGI Diversified Income & Convertible (ACV)’ Holds a mix of stocks, below-investment-grade or unrated corporate bonds, some convertible into equity, and preferred stocks. Biggest stock holdings include Alphabet (GOOG), Facebook (FB), Microsoft (MSFT), Amazon (AMZN) and Apple (AAPL). Virtus has returned 63% over the past 12 months and averaged 25% annually for three years. Pays nearly 17 cents per share monthly dividends (5.8% yield) and recently traded at a 4% discount to its NAV.
As always, historical performance doesn’t predict the future. Do your own research. The more you know about your funds, the better your results.
Harry Domash of Aptos publishes the Winning Investing and the Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To see previous Domash columns, visit santacruzsentinel.com/topic/Harry_Domash.