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Minyan Mailbag: Sorting Out the Discounts


...purchasing them gives you a discount on risk, but you still have it.


Hi Prof. Succo,

Jeffrey Saut mentioned in his latest article on Monday the following: "Two investment ideas we were suggesting a few months ago were large-caps focused Adams Express (ADX) and Tri-Continental (TY). Both of these closed-end funds were/are selling at roughly 15% discounts to their net asset values, implying that purchasing them would be like buying the S&P 500 (SPX) below the 1100 level."

In addition, some bond closed end funds (GDF, EDF, and HIX) are selling at deep discounts also.

I have some questions for you: I can understand a fund selling at 2 to 3 % discount, but how come we have such high levels of discount? Is the NAV based on liquidation prices (In the case of stocks and bonds)? Do you find such funds (selling at deep discounts) attractive?

Thanks and keep up the great work...

Best Regards,
Minyan Ziad


I haven't looked at these funds per se.

To capture those discounts, one could go out and short the underlying assets and buy the fund. That is the only way you can call these funds cheap; just purchasing them gives you a discount on risk, but you still have it.

Consider the friction costs such as market spreads and commissions in doing so. Consider the correlation risk as the portfolio of the fund changes before you can adjust your hedge positions. Consider the carrying cost of things like shorting bonds.

A real analysis of such would most likely reveal that there are not enough discounts left for the trouble.

As I said, however, if you want the risk, if you decide that you would take that risk outright anyway for your portfolio, they are a good way to do it.


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