One of the unique characteristics of a closed-end fund (CEF) is that an investor buys and sells a fund on a stock exchange such as the NYSE or NASDAQ at a share price just as they would for any other publically traded company. Open-end funds (commonly referred to as Mutual Funds) are bought and sold at the net asset value (NAV) of the fund and transactions are executed only once per day after the NAV is calculated. CEFs also have an NAV and, like open-end funds, it too is calculated once a day after the market closes. However, because the shares of a CEF trade throughout the day, the share price is subject to the supply and demand of the marketplace and is independent from the NAV. There are times when the share price is below the NAV in which case it is at a "discount to NAV" and there are times when the share price is above the NAV in which case it is at "premium to its NAV".
As I wrote in my blog from 8/8/13, we are currently in a period when discounts to NAV are much wider than historical averages for many CEFs. While periods like this when the CEF marketplace is being relatively inefficient as share prices trade well below NAVs for many funds can be frustrating for investors (particularly those who are new to the CEF structure), I urge patience for properly diversified CEF investors as historically discounts to NAV do revert closer to long-term historical discounts to NAV and historically share prices do gravitate towards NAVs.
The chart above shows both the 10 year share price (orange line) and NAV (blue line) total return performance of all CEFs. As the chart clearly shows, while there are periods when share prices are weaker than NAVs and discounts to NAV widen, such as in 2008 and now, it also clearly shows that historically over long periods of time share prices do indeed track NAVs. Furthermore, while I recognize investors who own CEFs own them at the share price and therefore the value they have in a fund is the share price (and not the NAV) multiplied by the number of shares they own, I think it is very important that CEF investors also pay very close attention to the NAV performance of the funds they own. While there are periods when the market is inefficient, and there can be big gaps between the share price and NAV, the chart clearly shows that historically share prices over time do track NAVs.
All opinions expressed constitute judgments as of the date of release, and are subject to change without notice. There can be no assurance forecasts will be achieved. The information is taken from sources that we believe to be reliable but we do not guarantee its accuracy or completeness.
To download a PDF of this post, please click here.