Discounts on closed-end fund discounts increased in November for the third straight month to the widest median discount in seven years.
The median closed-end funds tracked by Lipper finished the month at a 10.33% discount to the value of its holdings, compared with 8.72% below net asset value at the end of October.
The November level was the widest since November 2000, after the tech bubble burst.
"From a historical view, 2000 was kind of a turning point" for the economy, says Tom Roseen, a senior analyst at Lipper. "It was a very down market. I'm not going to say closed-end investors are a forecasting tool at all, but it certainly makes me look at it and see that the closed-end fund market started pricing up a really high discount."
By Nov. 30, only 51 funds in the closed-end universe were trading at a premium to NAV, after peaking at a one-year high of 240 funds selling at a premium on May 31.
Only 25% of all closed-end funds experienced narrowed discounts or widened premiums in November.
Despite a four-session rallly at the end of the month, the
finished November down 4.3%, and the NASDAQ fell 6.9%. As a result, closed-end funds that invest in stocks had negative returns for the first time in four months. The average closed-end equity fund tracked by Lipper lost 5.33% for the month.
"It could've been much worse had we not had the rally at the end of the month," Roseen said.
For the three-month period ended Nov. 31, equity closed-end funds had average net asset value returns of 1.79%.
Funds that track individual sectors were consistently down during the month. Domestic equity funds lost 5.24%, and world equity funds dipped 5.54%.
Still, 13 of the top 20 closed-end funds came from Lipper's domestic equity classification, though only two finished the month with positive returns.
Blackrock Health Sciences Trust
was up by 0.79% and went at a 13.58% discount on Nov. 30, while
Eaton Vance Risk-Managed Diversified Equity Income Fund
returned 0.51% and sold at a 12.68% discount on the last day of the month.
Combined, the top 20 equity closed-end funds lost 1.50%.
It is likely that discounts will continue to widen in December, since people tend to keep their holdings and wait until January to take a profit to avoid a 2007 tax hit. Roseen predicts that the market will be fairly illiquid through the end of the year.
"Investors play that," Roseen says. "They wait until the end of the year for the discount to get really deep, and then buy in January on the first day or two and then watch
the fund price pop back up again.
Just 29% of all closed-end funds tracked by Lipper saw positive returns on net asset value in November, with 487 funds in the red for the month.