More Bargains in Closed-End Equity Funds

Bargains in closed-end equity funds are becoming easier to find as investors become more concerned about lofty valuations in the stock market.

The median discount on closed-end equity funds widened by 33 basis points in May to 3.35%, according to Lipper. It was the second consecutive month of widening and occurred as the S&P 500 moved up 3.49% to close the month at an all-time high of 1,530.23.

Unlike open-end funds, which issue and redeem shares upon request at their net asset value, closed-end funds issue a fixed number of shares that trade on an exchange like stocks. Thus, share prices get bid up above net asset values when an investment style is in vogue, forcing investors to pay a premium. On the other hand, when the market sours on a fund, its share price can fall below net asset value, allowing investors to pick it up at discount.

Equity investors are "very jittery," says Tom Roseen, senior research analyst at Lipper. "Equity funds are widening, and people are more hesitant now and not willing to go out on that risk spectrum too far, and so they're stepping back a bit."

Roseen says the outstanding equity performance so far this year is likely a precursor to a period of volatility. There's typically a seasonal lull in the summer as traders cash in vacation time, so the analyst doesn't anticipate any big changes in the market. Roseen instead expects "a kind of gyration up and down, with not a lot of strong positive movements either way."