Expert Manager Talks Closed-End Funds

Q: How do you adjust your strategies while all this is going on?

A: When discounts are widening, we find it safer to be in funds with discounts that are already quite wide. In March, when fear was rampant, we found comfort owning New Ireland Fund(IRL Quote) and Old Mutual/Claymore Long Short(OLA Quote) at discounts approaching 15%. Additionally, we were able to park money in certain CEFs which historically both hold to tighter discount ranges and tend not to participate in general CEF moves, such as Adams Express(ADX Quote). We also picked up some funds with discounts that widened significantly more than the others, notably Calamos Convertible and High Income(CHY Quote), which went from a 5% premium to a 13% discount in less than two months.

After discounts stabilize and begin to narrow, we find that a good way to evaluate a CEF's attractiveness is to compare its discount to what it was before the widening began. We combine this comparison with our more traditional short-term indicators in making our trading decisions.

So, for example, in January, besides using our typical short-term indicators, we compared a CEF's discount to what it was in the last period of stability prior to tax loss widening. We still find that comparison useful, but currently we also compare a CEF to its average discount prior to the ARP scare. A good example of this is Eaton Vance Limited Duration Income(EVV Quote). We accumulated it at an 11% discount in late March and early April even though the discount had been as wide as 15% in the middle of March, because it had been much narrower in February.

Q: What if all the discounts in one sector widen? Do you pile in?

A: Yes and no. We try to identify sector moves as well, and when making our buy-sell decision, we consider not only the attractiveness of the discount of an individual CEF but also its relative attractiveness within its sector.