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Portfolio Insights by Brett Arends Archives | Email alerts
Oct. 28, 2011, 12:00 a.m. EDT
By Brett Arends, MarketWatch
BOSTON (MarketWatch) "” The turmoil of the last few months should remind investors, once again, of the importance of buying investments when they are on sale. Those who invested in equities during the slump in September, when everyone was panicking, are guaranteed better returns than those who invested, say, during the spring, when people were more cheerful.
While markets worldwide have rallied sharply on the latest deal in Europe, you can still find assets trading at discounts.
Among them are selected closed-end funds. They saw their discounts to net asset value widen sharply during the sell-off, and so far many of those discounts have yet to narrow. That doesn't guarantee you a free lunch, but it suggests a decent deal at the buffet.
That includes many closed-end funds that invest in emerging market stocks. Three that catch my eye right here at those run by Chuck Clough, a successful hedge-fund manager based in Boston: Clough Global Opportunities /quotes/zigman/416143/quotes/nls/glo GLO +0.48% , Global Allocation /quotes/zigman/353563/quotes/nls/glv GLV +0.08% and Global Equities /quotes/zigman/375965/quotes/nls/glq GLQ +0.19% .
WSJ's Thorold Barker and Francesco Guerrera analyze the Greek debt agreement with Mean Street host Evan Newmark. They consider the likelihood of its success and explain credit default swaps. Photo: JOHN THYS/AFP/Getty Images
The funds are variations on a theme. They are flexible investment funds that allow Clough and his team broad freedom to invest where they find the best bargains. From the point of view of investors, Allocation is the most conservative fund and Opportunities the most aggressive. Equities, naturally enough, is most focused on the stock market.
Closed-end funds are curious hybrid of a stock and a mutual fund. Few investors understand them, which can be their loss. Closed-ends are regulated mutual funds, much like any other, but with one important distinction. Instead of issuing new "units" to new investors, the fund issues a fixed number of shares in an IPO. Investors then buy into the fund, or sell out of it, by buying or selling their shares on the stock market.
Think of Warren Buffett's investment vehicle, Berkshire Hathaway /quotes/zigman/583979/quotes/nls/brk.b BRK.B -1.10% /quotes/zigman/583979/quotes/nls/brk.b BRK.B -1.10% . (It's not a closed-end fund legally, but operates much like one in practice.)
A few weeks ago Buffett said he planned to spend money buying back shares in Berkshire Hathaway, because they were selling for less than their intrinsic value.
The same is more obviously true of many closed-end funds. They publish their per-share net asset values every day. In many cases the shares are selling for far less than they are worth.
As of Wednesday's close, the stocks of all three Clough funds were trading at 15% below book value. To put this another way, investors were able to buy into these funds at 85 cents per dollar of underlying investment.
Is this a good deal? The future will have to be the judge. But all three funds have been successful at the net asset level since their launch. Over seven years, through the end of August, Global Allocation has earned 6.4% a year, compared to 3.6% for the Standard & Poor's 500 /quotes/zigman/3870025 SPX -0.20% . Over six years, Global Equity earned 5.4% a year, compared to 3% for the S&P 500. Global Opportunities, launched in 2006, has returned just over 2% a year since then at the net asset level, against less than 1% for the S&P 500.
Investors who bought into the funds at the launch haven't seen these returns. That's because closed-end fund shares are sold in the IPO at a premium to net asset values. The brokerage firms pocket the difference. Since then the shares have fallen to a big discount. But those who buy when the shares at a discount are not so disadvantaged. On the contrary, they'll benefit if the discount narrows.
Furthermore, the funds pay out most of their gains through fat dividends. The cheaper the shares, the higher the distribution yield. All three funds sport distribution yields above 9%.
As for strategy: Clough is betting on a number of trends right now. The needed restructuring in Europe, he says, should be bearish for the euro but bullish for the equities. He is buying deep value stocks where the cash-flow yield is high. He likes deep-water oil exploration and production companies.
And, maybe most controversially, Clough thinks U.S. bank stocks "could be great one- to three-year investments. Today's market has given them up for dead"¦ (but) balance sheets have been substantially repaired, bad loans are down," and, he adds, many bad debts have already been provided for with reserves. We shall see.
Closed-end funds are always worth a look during a financial panic, because the shares typically fall further than the assets. There are plenty of shares trading at a discount right now. If this rally proves sustained they should prove a decent bet.
Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.
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Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S... Expand
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co. Collapse
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