CEFs are trading at discounts because there are more sellers than buyers and that pushes the market price out further than its NAV, Galley says. “As the discount is widening, we are typically buying, so we are in essence contrarian to investor sentiment.
“A lot of investors get hung up on following the herd,” Galley continues. “When the herd starts going for the door, the discount starts widening. And it becomes a domino effect because the further discounts widen, the more market price losses there are and the more people are going out the door.”
That’s actually the time when you want to be buying, Galley notes. “Its pretty basic,” he says. “Buy low, sell high. But at the end of the day a lot of investors in CEFs are buying for yield purposes first and not looking at the total return.”
RiverNorth looks to buy and sell CEFs on a total return basis, which means buying at attractive discounts and selling as those discounts narrow to lock in excess return from that narrowing.