This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Royce, BlackRock Sell at Discount Prices

BOSTON ( TheStreet) -- Famed fund manager Charles Royce and bond-investing powerhouse BlackRock (BLK) are giving rare discounts this holiday season.

Closed-end funds including the Royce Value Trust (RVT) and BlackRock Credit Allocation Income Trust IV (BTZ) offer discounts of as high as 16%. The discount is the gap between the funds' price and their net asset value -- the worth of the underlying assets. If the difference between the two disappears, investors pocket the difference.

Closed-end funds are popular for investors chasing high yields, especially during times of low interest rates like today. For instance, Bill Gross has managed the Pimco High Income (PHK), which has a distribution rate of 11%.

Maury Fertig, chief investment officer at Relative Value Partners, a registered investment adviser in Northbrook, Ill., with more than $500 million in assets, says several closed-end funds sport attractive yields, though it's now getting harder to identify bargains. As the Federal Reserve earlier this month stated its intention to keep rates low, investors were given an incentive to seek out fatter yields and dividends.

"The real desire for yield in the last few years has pushed the average bond fund up to net asset value," Fertig says. "The bargains were there for a long time, but they've gone away. There are still a few equity funds that are most interesting. The biggest values remain in the equity world."

Relative Value Partners' niche is closed-end funds and exchange traded funds. Often the best opportunities are found when looking at the discount to the net asset value of a fund, or NAV.

Fertig's first goal is to help investors understand the benefit of closed-end funds. Rather than chasing the higher yields, he wants investors to understand that they have to go to the secondary market to buy and sell shares of the fund, so the manager doesn't have to deal with redemptions.

Second, managers can goose the returns of a fund because they are able to employ leverage. The yield curve is so steep, Fertig says, that the cost of borrowing is cheap. That may work in a stable or improving market, although it proved to be an unwise move during the collapse in late 2008 and early 2009.

Fertig's most important lesson, though, is for investors to understand that the best closed-end fund bargains are to be had when they are priced lower than their historic discounts. That means avoiding funds trading at a premium, like the Pimco High Income Fund, he says.

"You're paying $1.40 for $1 in assets," he says. "People will see Pimco High Income yielding 11% without knowing it's trading at a premium. This has an NAV of $9 and it trades at $13. The risk is that all of a sudden, something precipitates retail selling of the high-yield market. You don't have a safety net."

Instead, Fertig examines funds that have broken down for one reason or another by comparing the market price to the net asset value. "We look for places where we think will be an opportunity or catalyst that will get rid of that discount," he says. "That's the principle reason we play in closed-end funds."

To narrow the search for value more, investors should look at the historical returns of the NAV. When a return to the norm is expected, value is found, Fertig says.

This investment theme is not without risks. Fertig says the biggest risk is buying a fund with a great discount without looking at the underlying assets. "It's possible to have some bad assets or the underlying fees are insane," he says.

Read on to see three closed-end funds Fertig recommends to investors that are trading at an above-average discount to net asset value on a historical basis.
1 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BTZ $12.71 0.24%
NFJ $12.18 -0.16%
PHK $9.56 0.42%
RVT $11.73 -0.34%
AAPL $92.26 -1.10%


Chart of I:DJI
DOW 17,638.22 -22.49 -0.13%
S&P 500 2,044.40 -6.23 -0.30%
NASDAQ 4,692.2070 -24.8870 -0.53%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs