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Big Discounts in Several Closed-End Funds

Brett Arends

The stock market selloff in March 2000 proved to be the start of a long decline. The final slump in March 2003 turned out to be the bottom of the bear market and a great time to invest.

So far the jury's still out on the selloff of March 2006. But if you see the recent falls as a buying opportunity, you might as well grab, say, 10% off, instead of 5%.

A week ago, I predicted that market turmoil would throw out some great discounts in the closed-end funds, and so far this has proved correct.

To recap: Closed-end funds are professionally managed investment vehicles, much like open-end mutual funds, except that they issue only a fixed number of shares. People who want to put money in, or take it out, have to buy or sell those shares on the market as they would stock in a company.

The bottom line: When the market tanks, those shares can fall well below their investment value and give you a bargain.

Looking to put some money into the China region following the turmoil of the last two weeks? Take a look at the (CHN Quote)China Fund (CHN), which is independently managed and one of the longest-established U.S. vehicles for investing in the area. Since the end of January, the net asset value per share -- in other words, the underlying value of its investments -- has actually risen 55 cents to $35.14, as of Thursday's close, according to calculations from Nuveen Investments(JNC Quote).

Meanwhile, the price you pay to own those investments has slumped: The shares have fallen from $32.19 to $30.87.

That's a remarkable 12% discount to the net assets: the equivalent of buying $1 worth of investments for every 88 cents.

The picture is almost as good over at the China Fund's main rival, the (GCH Quote)Greater China Fund (GCH), which is run by Barings Asset Management. Although the latest figures are not yet available, as of the start of this week the shares had widened to a 9.45% discount to net assets. Since then the share price has risen 92 cents to $22.95.

These are well-managed investment vehicles with good track records. Over the past five years they've done better than most open-end mutual funds that invest in China.

If Asia seems too volatile right now and you're looking for something closer to home, you may have been listening to Jim Cramer's advice on the three Ds -- in other words, buying a Diversified basket of stocks that have Defensive qualities and pay good Dividends.

First stop: three closed-end funds run by Eaton Vance (EV Quote) (EV) in Boston that follow precisely that philosophy. All three carry the conservative stamp of co-manager Judy Saryan, the mutual fund company's veteran utilities expert.

The (EVT Quote)Eaton Vance Tax Advantaged Dividend Income Fund (EVT) has slumped to a 9.8% discount to net assets. The shares, at $26.40, carry a wonderful 6% dividend yield. Dividends are paid monthly. The top 10 holdings, as of last quarter, included utilities such as Edison International (EIX Quote) and Germany's RWE and E.ON (EON Quote), along with Marlboro cigarette giant Altria(MO Quote), AT&T (T Quote), banks Wachovia(WB Quote) and HSBC(HBC Quote), and a few oil companies.

Eaton Vance's (ETG Quote)Tax Advantaged Global Dividend Income Fund (ETG) has a similar investment profile. It has widened to a 9.1% discount. At $24.79, the shares yield 6.05%.

A third closed-end fund, (ETO Quote)Tax Advantaged Global Opportunities (ETO) is more heavily weighted towards oils: As of last quarter, they made up most of the fund's top 10 holdings. At $28.24, the shares are 8.4% below net assets and yield 6.36%.

In general, buying stocks with high and sustainable dividend yields is one of the great long-term investment strategies. Too many investors, chasing the excitement of "growth" stocks, forget the value of regular, steady dividend checks. Saryan pursues a simple and conservative strategy and invests the funds' money worldwide.

A kicker is that all three funds boost their returns with leverage. They have borrowed between 25% and 29% against their holdings, by issuing preferred shares that pay interest linked to the federal funds rate. View that as a small adjustable-rate mortgage held against the equity.

That might be a worry if interest rates were to skyrocket. However, it's noticeable that the funds have actually managed to increase their monthly dividends over the past few years, while the Fed hiked rates. Put simply: The companies they have invested in have raised their dividends faster than the Fed has been able to raise rates.

If the turbulence of the past few weeks turns into something much worse, you would expect all stock market investments to go down. But in the case of these three Eaton Vance funds, you should benefit from a double cushion. First, you're already investing in the market at a big discount. And second, in a serious downturn you would expect the Fed to respond by cutting rates, not raising them further. Which means these funds will benefit from cheaper borrowing costs.