More Bargains in Closed-End Equity Funds

Discounts on domestic equity funds widened the most last month, with the median moving out by 135 basis points to 4.36%. The median discount on world equity funds widened by 115 basis points to 8.50%.

Equity funds are bucking the overall trend in closed-end funds -- bargains as a whole are becoming harder to find. The median discount on closed-end share prices to their net asset values narrowed by 24 basis points during May to 1.81%. It now stands at the narrowest lowest level since March 2004, according to Lipper. It was the third consecutive month of narrowing discounts.

The overall trend is being driven by fixed-income closed-end funds, for which the median discount narrowed by 49 basis points to 1.22%.

People's willingness to pay for the yield is the main reason that discounts continue to narrow "to near-record levels," according to Tom Roseen, senior research analyst at Lipper. After all, Roseen notes, closed-end funds are sold on yield. A fund with $20 of assets per share trading at a discount of 10% provides a higher yield to investors than if they paid for the NAV.

In May, 45% of all funds saw their individual discounts narrow, premiums widen or premiums replace discounts; but the figure was just 26% for equity funds compared with 56% for fixed-income funds.