“Investors seize the opportunity as market turmoil leads to an unprecedented sale in these mutual funds, paving the way for potential long-term gains.”
If you’re looking for investment opportunities during the recent market turmoil, closed-end funds might be worth considering. These regulated mutual funds, which trade on the stock market, are currently offering significant discounts to their intrinsic value. In fact, discounts are the widest they’ve been since the world financial crisis. Closed-end funds that invest in tax-free municipal bonds are currently at their biggest average discounts in at least 25 years.
The current discounts are the result of several factors, including the bond-market rout over the past two years, fears about the Federal Reserve’s next move, and a wave of tax-loss selling that will end on October 31st. Many closed-end funds invest in bonds and have been hit hard by the plunge in bond prices. Additionally, funds that use leverage to boost returns have suffered even more due to borrowing at short-term rates. Meanwhile, other investors have been selling losing investments to offset capital gains elsewhere, adding to the selling pressure on the worst-performing closed-end funds.
Closed-end funds are unique in the fund industry because their share price trades independently of the underlying value of the investments. This means that during times of market turmoil, their stocks can fall well below the value of the investments. However, it’s important to be cautious when investing in closed-end funds, as there can be issues under the hood. Some funds still use leverage despite losing money for investors, while others charge high fees. It’s crucial to thoroughly research a fund before investing.
That being said, there are opportunities to be found in the closed-end space. Many investors have panicked and sold shares in closed-end funds that own floating-rate notes, even though these notes actually benefit from the Fed’s rate hikes. With over 600 closed-end funds on the market, there are options for various investment strategies, including municipal bonds, regular bonds, off-piste strategies, gold and silver, energy infrastructure, and stocks.
Some closed-end funds currently trading at significant discounts include the Nuveen AMT-Free Municipal Value Fund, the Western Asset Municipal High Income Fund, and the BlackRock 2037 Municipal Target Term Trust. Among taxable bond funds, the Western Asset Investment Grade Income Fund, the AllianceBernstein Global High Income Fund, and the Templeton Emerging Markets Income Fund are trading at discounts as well. For investors willing to take on higher risk, levered funds such as the Western Asset Diversified Income Fund and the Nuveen Preferred & Income Securities Fund also offer discounts.
It’s important to note that these discounts may not last, so investors should carefully consider their options. While closed-end funds can offer attractive opportunities, it’s crucial to thoroughly research each fund and understand the risks involved.