Sunday, October 26, 2008

Fear and Loathing in Closed End Funds.

Closed end funds are like ETFs (exchange traded funds) in that they are traded on an exchange like stocks, and are made up of a bundle of other securities. Closed ends funds are unlike ETFs in that ETF shares are created and de-created (for lack of a better term) each day dynamically as demand warrants. Closed end fund shares do not have this dynamic creation/de-creation aspect. The other big difference is that closed end funds often trade at discounts or premiums to their underlying asset value, depending on how the market feels. When everybody wants in, they tend to trade at premiums, and when there is less or no demand, they tend to trade at discounts, sometimes severe.

It's interesting to look at the premiums/discounts that closed end funds have traded at over time. Sometimes it can identify an extreme in market emotion that could signal a panic bottom.

Below I show a few closed end funds and their premium (+) or discount (-) from their net asset value. The data is from Barron's. Notice the extreme swings and readings on the week ending October 13, 2008. It's too early to call the exact bottom in the market, but based on these readings, and the way we traded on Friday (futures limit down, lots of talk of a crash, but a day turned out less feverish than anticipated) suggests the extreme panic point may be behind us.

Premium/Discount from Net Asset Value on Selected Closed End Funds.

BDV = Blackrock Dividend Achievers
BGR = Blackrock Global Energy
GUT = Gabelli Utility
APB = Asia Pacific Fund

WIA = Western Asset Inflation Linked
HIS = Blackrock High Income (High Yield)
BFK = Blackrock Muni Income


04-02-07 -6.3 -10.2 +18.6 -11.7 -10.3 -4.0 +16.4

06-30-08 -12.2 -15.7 +31.1 -9.6 -9.0 -12.1 +3.5

09-22-08 -17.6 -16.1 +44.8 -4.3 -14.0 -25.0 -7.2

10-13-08 -17.7 -23.4 -0.4 -22.2 -23.2 -38.1 -28.3 <-- Fear Itself

10-20-08 -12.0 -11.9 +41.8 -3.3 -14.5 -19.3 -6.1

10-27-08 -9.2 -13.8 +37.6 -13.4 -10.9 -19.6 -4.5

Unfortunately, it's difficult to make those line up very well.