I haven’t written about closed-end funds in a while, so when I was skimming through the possible teaser pitches I might cover today this one caught my eye. It’s for Sovereign Man’s 4th Pillar newsletter, helmed by Tim Staermose (it’s pricey at $1,995/year but does, at least, offer a 30-day money-back refund, something most of the high-end letters that are heavily promoted have stopped doing).
And the ad is all about what most closed-end investors dream of: closing the discount.
If you’re not familiar with closed-end funds, they’re basically like mutual funds or ETFs — but unlike those fund structures, there’s no mechanism for immediately smoothing out a huge premium or discount valuation. Closed-end funds generally own the same kinds of publicly-traded stocks as any other mutual funds, and they report their net asset value every day (usually), but they don’t promise to redeem shares at NAV every day(like a mutual fund) or offer to let institutions redeem shares (like an ETF), so the shares can trade in the public market at a price that’s much higher or much lower than the value of their actual portfolio holdings.
The general tendency is for most close-end funds to trade at a discount to their NAV, whether because of the performance of the fund manager or the worries about their cost of leverage (many closed-end funds borrow money to improve their returns), but some of them are particularly adored by investors, particularly if they generate consistent dividend income, and do trade at frightening premiums. And they also tend to be levered to the market even if they don’t use a lot of debt — that’s because when there are mass selloffs in the market it’s not unusual for CEFs to get sold off in the same proportion as everything else, while the NAV is also falling, and therefore they may tend to fall more harshly… and, on the flip side, when there’s ebullience in the market and prices are soaring and CEFs are performing well, people pile into them and the shares begin to trade at a smaller discount to the NAV (or even at a premium), helping the shares outperform.
Asset managers like closed-end funds because they are “captive” funds — once you raise the money to form a closed-end fund, there’s no simple mechanism for “cashing in” the shares like you can with a regular mutual fund, the way that investors get out of the fund is by selling their shares on the public market. That doesn’t impact the portfolio or the manager’s management fee — they continue to have the same assets under management, so they collect the same fee, and they don’t have to sell stuff they don’t want to sell just because investors are redeeming shares at the absolute worst time (which is the fear of most mutual fund managers, and one reason why they tend to keep a fairly substantial cash cushion on hand to manage redemptions).
Closed-end funds are companies, really, so they can make changes that benefit shareholders — it’s just not a particularly sexy form of shareholder activism. They are mostly too small to attract big hedge funds, but there have been activist investors focused on the closed-end space for a while as they try to shake up sleepy boards or get fund managers to make more effort to close the discount, often by offering redemptions at NAV or buying back shares of the fund. The most prominent and largest firm involved in closed-end funds recently has probably been Saba Capital, though Bulldog Investors gets a fair amount of attention too (perhaps partly because both Saba’s Boaz Weinstein and Philip Goldstein of Bulldog are both fairly high-profile and regularly speak at investment conferences).
Interestingly enough, both Saba and Bulldog also offer their own exchange-traded funds that give exposure to their investment strategy… which is, in part, to narrow the discount at which closed-end funds trade and profit from that narrowing (by buying at a big discount and selling at a much smaller discount or at NAV). And, yes, one of those funds also trades at a discount (Bulldog’s is the Special Opportunities Fund, ticker SPE, trades at about a 12% discount right now… Saba’s Closed-End Funds ETF is actually an active ETF, not a closed-end fund, so trades near NAV).
But while that might be interesting, I’ve gotten pretty far afield — neither of those is the Closed-End Fund being teased by Sovereign Man… so what is this secret investment?
Clues from the ad:
“… after you learn the full story about this investment, you’ll see there aren’t many ways this can go wrong.
“Even better, there’s a catalyst at work, right now, that could send shares ripping higher any day now….”
And we get a few hints about the holdings in this fund:
“I’ve found a way to buy a basket of some of the biggest and safest blue-chip stocks out there at a massive discount to where they trade on the open market.
“You’d know the names of these companies…
* One of them is a well-known consumer brand ($90 billion)
* Another is a leading services provider to businesses ($60 billion)
* And there’s a global food giant whose products are probably in your kitchen cabinet ($70 billion)….
“Through this publicly traded fund, you can buy the exa