Closed-End Equity Funds Overdue for Some Love

11-13 Herzfeld

Source: Thomas J. Herzfeld Advisors, Inc.

Strong year-to-date gains in broad-based equity indices are attracting increased media attention, now that interest in the U.S. budget and debt ceiling crises has temporarily waned.

For the first ten months of 2013, the Dow Jones Industrial Average gained 18.63% while the S&P 500 posted a 23.16% advance. Not surprisingly, investors are beginning to take notice.

The Wall Street Journal recently reported Investment Company Institute statistics, indicating that “Equity mutual funds have recorded weekly increases for most of 2013 after investors shied away from them following the 2008 financial crisis.

For the week ended October 23, equity funds had inflows of $13.54 billion, far higher than the estimated inflows of $2.93 billion in the previous week. Domestic stock funds jumped $9.19 billion, while foreign equity funds added $4.36 billion.”

Discount Play

In spite of the favorable underlying trend among mutual funds, investor interest in equities has not yet filtered down to closed-end funds. Discounts for equity closed-end funds remain relatively wide, even when compared to earlier this year. The chart below shows discount levels for specialized equity funds. The group is currently trading -7.58% below net asset value – near the widest discount level for 2013.

11-13 Herzfeld
Source: Thomas J. Herzfeld Advisors, Inc.

Although several closed-end equity funds have been hurt by their strong emphasis on income, many older, growth-focused equity funds are also trading at wide discount levels. We expect these funds will benefit from the rising tide of retail interest and a growing appreciation for total return, now that income investments have lost favor.

With more than four dozen equity closed-end funds currently trading at double-digit discounts, including some of the oldest, most well-established names in the industry, we consider this an excellent opportunity to consider adding to core equity fund holdings.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.