Photo:ldysw357, Creative Commons, Flickr
This phenomenum of closed end funds getting cheap into year end and rebounding is another type of January effect that is well known but not without risk. It is well known, and yet it continues to exist. Part of the reason may be that the lack of liquidity keeps any hedge fund or bank trading desk from taking advantage of it. I know that there are funds that engage in closed end fund trading strategies, but there always seems to be room at year end for this one to work.
I've been buying fixed income closed end funds at a cheap, but by no means unprecedented, 13-15% discount to NAV (Net Asset Value) this year end. The cheapness usually disappears with the changing of my calendar to a new year and that's when I take profits. I will exit this trade based only on the cheapness of the funds to NAV. I risk the bond market falling (interest rates going up), or the bond portfolios underlying the Closed End Funds collapsing for some other reason, like credit concerns or the liquidity crisis we have seen this past quarter. And while they carry greater than normal bond because some funds are leveraged, they also carry a yields from 4-7% that is nicely at or above the Fed Fund's rate.
So what did I buy this week? Here is the list of four municipal bond funds and one taxable income fund:
Nuveen Maryland Dividend Advantage Municipal Fund 3 (NWI – $12.27)
BLACKROCK MUNIYIELD (MCA – $12.50)
Neuberger Berman Intermediate Municipal Fund Inc.(NBH – $12.55)
Investment Grade Municipal Income Fund (PPM – $12.70)
Evergreen Multi-Sector Income Fund (ERC – $15.63)
I'm still searching around for more.
Disclosure: I own and bought every closed end fund mentioned above. I may buy more. I would likely sell in the first quarter next year or if the discounts on the funds close to less than 7% before then.