The majority of taxable and tax-free bond funds are selling at premiums to net asset value as investors pile in to capture higher yields. Nevertheless, the PIMCO Income Opportunity Fund is selling at 90 cents on the dollar.
Taggart recommends that advisors take other variables into consideration besides the discounted stock prices. "Once you purchase a closed-end fund, the only thing you should care about is the subsequent total return," he says. "If you buy a closed-end fund at $8 per share when the fund is trading at a 5% discount, you're likely to be satisfied when the fund is trading at $9 per share, even if the discount has widened to 10%."
Financial advisors scrutinizing closed-end funds can spot investment opportunities in funds that may exhibit some of the following characteristics, based on research studies published by the National Bureau of Economic Research, Washington, D.C. For example:
A fund that owns restricted stocks or has unrealized capital gains in the portfolio can sell at a discount.
If you get wind of a portfolio manager's pay raise, consider that the fund's discount often narrows when compensation increases.
Funds that don't disclose the portfolio holdings as frequently as other funds tend to have larger discounts.
Funds that use leverage typically sell at larger discounts when their respective markets are underperforming.
Closed-end country fund share prices are often a function of countries' overall weightings in foreign stock market indexes. So the discount can swing with bull and bear markets. As a result, bear markets may lead to big discounts in closed-end country funds.
Poorly performing funds with large discounts tend to bounce back when an exiting manager is replaced.
Discounts and premiums track the investment cycle. So when small company stocks perform well during the first stage of an economic recovery, it is an indication that other stock fund discounts may eventually narrow.