Bargains in closed-end funds continued to pile up in August as discounts reached their widest level in over a year.
The median discount on closed-end equity funds tracked by Lipper widened by 83 basis points to 6.44% from a revised 5.61% in July. That marked the widest month-end level since July 2006.
That actually represents a partial recovery from the widest levels reached during the volatile month. "In the middle of the month there were some really, really deep discounts," says Tom Roseen, a senior research analyst at Lipper, "and a lot of the closed-end investors that were somewhat savvy jumped in," bidding them back up.
Unlike open-end funds, closed-end funds are not continuously offered. After an initial public offering, they are bought and sold on an exchange like stocks, frequently trading below the value of their holdings.
There are still plenty of bargains left. If a fund trades at a discount of 6.44% to its NAV, investors can purchase $100 worth of assets for just $93.56.
In August, 49% of all closed-end funds' discounts narrowed or premiums widened. Just 31% of equity funds saw their discounts shrink, premiums widen or premiums replace discounts.
Closed-end equity funds eked out a positive return of 0.12% for the month, finishing in the black for the first time since May. The performance trailed that of the
Dow Jones Industrial Average
, which finished the month up by 1.1%.
After five months as the top-performing equity sector, world equity funds lost 1.27%, while domestic equity funds improved by 0.94%. Fifteen of the top 20 performing individual funds came from the domestic equity sector, of which 13 were classified as real estate funds.
As in July, the
Morgan Stanley China A racked up the best performance of any closed-end fund. It returned 24.58% for the month, yet sold at a 20.75% discount on Aug. 31.
DWS RREEF Real Estate came in second, returning 9.22% and trading at a 10.41% discount, followed by
DWS RREEF Real Estate II Inc., which returned 8.89% and finished the month with a 9.98% discount.
In total, investors bid up closed-end funds that invest in REITs by 3.79% in August, after declining by 10.20% in July.
"I'm not going to call it an anomaly, but it was somewhat of a surprise to see REITs funds doing as well as they did," says Roseen. "I think there might have been an overselling of it, and people still see attractive yields from the group, so you might have seen people doing some basement-level shopping."
Unlike residential mortgage lenders and homebuilders, REITs -- which deal with commercial projects such as office buildings, golf courses and shopping centers -- have been largely unaffected by concerns directly related to subprime mortgage lending.
By the end of the month, 110 closed-end funds of all funds were trading at a premium, down from the one-year high of 240 funds trading at a premium on May 31, 2007.
Discounts on fixed-income closed-end fund discounts tightened by 32 basis points to 5.42% in August as investors sought more stability.
"The name of the game is still volatility, and people just aren't really sure what's going on," Roseen says. "I expect people will remain very concerned about volatility for the remainder of the year. It may not be quite as severe, but all bets are off."