Closed-End Bond Funds Near Their Deepest Discounts Since 2008

While most of the world’s attention has been on the China market meltdown and the Greek debt showdown, closed-end bond funds have quietly been priced to deliver solid total returns over the next 12-18 months. To take advantage of this pricing, I have carved out an 8%-10% allocation to closed-end bond funds in my Dividend Growth Portfolio. With the Fed’s looming rate hike casting a shadow over the bond market, many high-quality closed-end bond funds are trading at their deepest discounts to NAV since the 2013 “taper tantrum,” and some are approaching levels last seen during the 2008 meltdown. Starting at these levels, I expect a portfolio of closed-end bond funds to deliver total returns (income + capital gains) of 15%-20% over the next 12-18 months.

To better explain what I’m talking about, let’s look at an example. I’ve been buying shares of the Eaton Vance Limited Duration Income Fund (EVV) in recent weeks. EVV owns a portfolio of bonds and bank loans and yields a very respectable 8.9%. Its portfolio has lost value this year as bond yields have crept higher, yet its market price has fallen much faster than its NAV. As a result, EVV is now trading at its deepest discount to NAV in five years: 12.7%. As recently as two years ago, EVV was trading at a 4% premium to NAV. We have the current yield of 8.9%. Assuming no improvement in NAV but that the fund’s discount improves from the current 12.7% to a more reasonable 7%, you’d tack on another 5%-6%. That gets us to just shy of 15% total returns. And if the underlying NAV rallies — and I expect it will — we can get to total returns of 20% pretty quickly.

Source: Guru Focus

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