By LYNEKA LITTLE and SHEFALI ANAND
August 22, 2007; Page C3
For aggressive investors with a stomach for risk, the volatile market is generating some buying opportunities in corners of the mutual-fund world.
A handful of closed-end funds and exchange-traded funds -- types of mutual funds that trade on an exchange, like stocks -- have taken particularly big hits in recent weeks as panicked investors bailed out indiscriminately. Analysts now say a few of them look undervalued.
In particular, some closed-end funds are trading at much wider-than-usual discounts to their net asset values. Unlike regular mutual funds or ETFs, closed-end funds issue only a set number of shares. Thus, depending on investor demand (or lack of demand), they can trade at prices above or below their NAV.
Usually, a Slight Discount
Typically, closed-end funds trade at a slight discount to NAV, but in the past few weeks or so the gap has widened: The median discount for all closed-end funds stood at 6.5% Aug. 20, according to research firm Lipper Inc., wider than the 4% median discount June 29.
A number of funds are trading at particularly steep discounts that some observers say make them buying candidates for aggressive investors looking for ways to play the turbulent market.
Many of the candidates are clustered among funds that invest in foreign stocks and bonds, as well as those investing in staid municipal bonds and dividend-paying stocks. Some of these funds had been trading at premiums until a few months ago.
For instance, the Lazard Global Total Return & Income Fund, which invests in stocks and foreign currency, is trading at a discount of about 12% to NAV.
The fund focuses on large companies with global revenue, says Gregory Neer, an analyst at Stifel Nicolaus, a brokerage and investment-banking firm in Baltimore. (The fund is a client of Stifel & Nicolaus.) But the fund also has 35% of assets in foreign-currency and debt markets, which can be a risky play. Lazard declined to comment.
Thomas Herzfeld, a Miami-based money manager who invests in closed-end funds, cites the Morgan Stanley Global Opportunity Bond Fund, which is currently trading at a 10.2% discount to the value of the assets in its portfolio. The fund's share price has declined about 39% since its peak in February, but its NAV is down only about 3%, says Mr. Herzfeld.
Similarly, he says, the BlackRock California Investment Quality Municipal Trust, a municipal-bond fund, is trading at a 6.8% discount. The fund's share price has fallen 24% since its peak in February, while the NAV has fallen only 7% in the same period, says Mr. Herzfeld. (He owns both of these funds.)
The fund companies couldn't be reached for comment.
Possible Liquidation
Some particularly small closed-end funds can be candidates for possible liquidation or merger with regular "open-end" funds that don't trade on an exchange. When that happens, it can provide an instant windfall for investors because the liquidation would have to be done at NAV, which is higher than the current share price of the fund.
"Small funds at large discounts generally don't have long lives ahead of them," says Mr. Herzfeld.
Some municipal-bond funds are also considered potentially good buys, as they aren't directly impacted by some of the troubles in the mortgage markets. Mr. Neer of Stifel Nicolaus cites the Morgan Stanley Quality Municipal Securities fund, which has a taxable equivalent yield of more than 8% for investors in the 35% tax bracket.
He says the fund would also benefit if the Federal Reserve were to lower interest rates. The fund is selling at a 6.5% discount.
Analyst Advice
Some analysts advise looking at investing in financial stocks, including banks. Stocks of these companies have been particularly hard-hit, amid worries about exposure to the mortgage business.
But many of these companies have solid underlying business fundamentals that should see them through the current turmoil. Nevertheless, they are currently selling cheaper than they were a few months ago.
Sonya Morris, an ETF analyst with research firm Morningstar Inc., particularly likes the KBW Bank ETF, which invests in banking stocks. "We think [these companies] have the ability to sustain for a long time because of their competitive advantages," she says.
Mark Salzinger, editor of The Investor's ETF Report, suggests that investors also look at two iShares ETFs that invest in stocks of Korea and Taiwan, two countries that have taken a hit recently as foreign stocks followed U.S. markets lower. He says these markets are selling at lower price-to-earnings ratios than some other Asian markets, like China, but have good growth prospects.
"In an era of strong global growth, that's a very good place to be," says Mr. Salzinger.
Write to Lyneka Little at lyneka.little@wsj.com and Shefali Anand at shefali.anand@wsj.com
