Closed-end-funds that trade at large discounts to net asset value have worked out pretty well for me over the years. And I do even better when activist shareholders are demanding a tender offer, share buyback or even a fund's liquidation to close the discount and unlock shareholder value.
Here's a look at two such situations that I uncovered recently by looking at 13D filings made with the U.S. Securities and Exchange Commission:
Virtus Total Return Fund (DCA)
One of the busiest closed-end-fund activists is Bulldog Investors' Phillip Goldstein, whose latest target is the Virtus Total Return Fund. This fund currently trades at around a 12.5% discount to the net asset value, but Bulldog wants that to go away.
Bulldog recently sent a letter to DCA announcing plans to ask stockholders to approve the fund's liquidation, so as "to eliminate (the) persistent trading discount and allow all shareholders to realize net asset value."
DCA holds a 60/40 mix of stocks and bonds, with a portfolio full of traditional high-yielding stocks like utilities and telecoms. The fund also sells puts and calls to create additional income, but has been an average performer, dropping a little more than 7% last year.
The fund yields 6% at current prices, but total returns could top 20% if the discount to NAV is closed.
Zweig Fund (ZF)
Karpus Management, which has a pretty solid record during its more than 15 years as a closed-end-fund activist -- has been a big recent buyer of the Zweig Fund.
I'm old enough to recall this fund's IPO in 1986, when Marty Zweig was all the rage on Wall Street and his books were bestsellers. The fund currently invests in stocks like Facebook (FB), Alphabet (GOOG, GOOGL), McDonald's (MCD) and other well-known names, but shares trade for around an 11% discount to NAV.
Karpus filed an initial 13D on Dec. 29 to announce a 13.3% stake in the fund, but has been steadily buying more shares and now owns 15.4%. The firm noted in its filing that "ZF's net-asset-value performance has underperformed across each time period by a substantial amount. As the fund's own data show, on average ZF has underperformed by 3.15% per year since the fund's inception."
Karpus wants ZF to launch a tender offer for all shares at net asset value, and to liquidate the fund if investors tender 50% or more of outstanding stock. A liquidation at today's prices would offer about a 12% return, or even more if stock prices move higher between now and the tender offer's commencement.
Part of me hopes Karpus fails, as ZF has been a bear-market favorite of mine. The fund traded at more than a 20% discount to NAV in late 2008, allowing me to buy shares for around $3 each. I sold my stake a few years later for more than three times what I paid.
However, there's a very good chance that Karpus will succeed in forcing the Zweig Fund's liquidation, given the firm's large stake and ZF's underperformance.
The Bottom Line
Savvy investors will find that following 13D filings for closed-end funds makes a lot of sense, as buying heavily discounted shares often provides double-digit returns in a fairly conservative fashion.
Many of these funds have generous distribution policies, so this strategy also makes sense for income investors willing to take a more hands-on approach to managing their portfolios.