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Bruce W. Kaser, CFA
June 17, 2019

Closed End Equity Funds: Buying Stocks at a Discount

The historic Wall Street in New York York City.


When is it possible to buy stocks at large discounts to what everyone else pays? When you buy them through a closed end mutual fund.

Like open-end mutual funds, closed end funds (“CEFs”) hold actively managed baskets of publicly-traded stocks. Yet unlike their cousins that can expand or shrink their size based on whether investors are buying or selling, closed end funds have a fixed number of shares. Investors can trade the shares throughout the day at whatever price the market determines. In the ideal world, the shares would trade at the value of the underlying basket of stocks net of liabilities, or net asset value (“NAV”), but this rarely
is the case.

Most CEFs trade at a discount to NAV. Reasons for this include: the fund may focus on an out-of-favor segment or hold illiquid securities; investors may have lost faith in the manager’s ability to pick stocks; or perhaps the fees and incentives of the managers aren’t aligned with investors’ interests. Some closed end funds hold stocks with large gains, reducing the after-tax NAV should these stocks be sold, as investors are responsible for paying taxes on realized gains.

In some cases, shares of CEFs trade at substantial discounts of 15-20% to NAV. This benefits investors in several ways: the discount can shrink (providing extra returns), they can buy the fund’s income stream at a reduced price, and they can re-invest any distributions at the discounted price, in effect putting a dollar to work at a cost of perhaps 85 cents. Moreover, sometimes activist investors will push for the
liquidation of a closed end fund, which would reduce its discount to nearly zero.

Listed below are some CEFs with large discounts to NAV that we think are worth a look. Some of the yields appear high, and so potential investors will want to be aware that the yield is based on all distributions, including dividends and capital gains (and some CEF’s even return the investors’ capital to them in theform of dividends).




Adams Diversified Equity (ADX) – Based in Baltimore, the respected Adams Funds family, founded in 1929, has two entrants on our list due to their high discounts and high quality. The Adams Diversified Equity fund holds a roster of 93 large-cap U.S. equities, with a bias toward tech and growth stocks. Microsoft, Amazon, Apple and Visa currently comprise about 15% of its assets. Its capable management, growth orientation and low .56% expense ratio have boosted returns to above the S&P500 index in recent years. The fund has a minimum annual distribution of 6%, which includes dividends and capital gains (and possibly a return of capital), providing a regular flow of cash to investors.

Adams Natural Resources (PEO) – The Adams Natural Resources fund focuses primarily on energy companies. ExxonMobil, Chevron and EOG Resources currently comprise over 35% of its assets. The fund also holds 54 other companies across the energy services, refining, chemical, packaging and metals/mining industries. Performance has been a struggle in recent years with the volatile energy prices. Expenses are a reasonable .79%, and the fund carries the firm’s commitment to a minimum 6% annual distribution rate.


Boulder Growth and Income Fund (BIF) – This fund holds a highly concentrated portfolio of 15 value-oriented large-cap equities, along with a small amount of other non-cash securities. Berkshire Hathaway (at 33% weight), JPMorgan, Cisco, Yum Brands and Caterpillar comprise nearly 60% of assets. Investment performance has been weak compared to the S&P500, partly explained by the fund's high 13% cash holdings. With the sizeable discount to NAV, the fund occasionally repurchases its shares, including buying in about 0.7% of its shares in the first quarter.


Central Securities Corporation (CET) – Founded in 1929, this old-school fund has nearly a quarter of its assets invested in a 23% stake in privately held Plymouth Rock Company, a diversified property and casualty insurance company in the upper East Coast. This investment appears to be successful, given
its $170 million current value compared to its $0.7 million cost. The balance of the holdings are well-known large-cap U.S. companies like Intel, Analog Devices and Motorola Solutions. Share turnover is very low, at an 8% rate last year. Expenses are also low at .69%. CET pays a steady dividend, and its returns have been healthy compared to the overall market.


General American Investors (GAM) – Venerable GAM, established in 1927, holds a diversified portfolio of well-known U.S. stocks, led by TJX Companies, Microsoft and waste services company Republic Services. The fund is authorized to repurchase shares any time the NAV discount reaches at least 8%, which allowed it to buy-in over $41 million of shares last year at a 16% discount. The 1.2% expense
ratio is a bit high, and near-term returns have lagged. However, the long-term cumulative investment return, including dividends and other distributions, has been impressive.


Herzfeld Caribbean Basin (CUBA) – This fund focuses on stocks that would benefit from easing of the United States’ trade embargo with Cuba. Its shares surged to a 30% premium in 2015 when the embargo was temporarily eased, but have since slipped to a sizeable discount. The fund holds mostly mainstream U.S. and Latin American equities like construction company MasTec, cruise liner Royal Caribbean and Puerto Rican bank Popular. It also holds some obscure Cuba-based assets but these rightfully have been written down to zero. While quirky (and expensive, with a 2.7% expense ratio), this fund might offer some appeal to savvy investors interested in working the discount.


Royce Global Value Trust (RGT) – Managed by value investing legend Chuck Royce and his highly regarded Royce & Associates, this fund focuses on small and mid-cap value stocks around the world. It is highly diversified, holding nearly 200 stocks, with about 90% of its assets in developed market equities. RGT has a somewhat elevated 1.7% expense ratio, yet part of this may be due to its small size.
Potential investors should be aware of RGT’s volatile performance, reflected in a -18% return last year following a 36% gain the prior year.

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