chamois:

Alan, if you're not familiar with the complexities of cCEF, a first step woud be to read some basic materials. The CEF Assn has some reading materials; I provide the link below.  scroll down on the right side you will find five introductory booklets of interest.

CEFA 

Each CEF has an equilibrium discount worth knowing.  Buying it at that discount or  greatercan be important.  One also nees to know the makeup of the distribution. Many closed-end funds, including the reit CEF,  often return shareholder paid in capital.  Good luck!

Greetings, Chamois, and thanks for engaging with me here.

I've read the CEFA pamphlets, and they are helpful, but I imagine the key is in being able to grasp how the variables are interacting in each situation; I'm not quite there yet.

The "equilibrim discount" concept is intriguing, and it would be very helpful if I knew how to find it. I don't see this term discussed anywhere else. Can you describe it further?

Digging deeper into the Nuveen website, I found the answer to my question about JRS. Thanks for the encouragement!

 alan 

Depending on how interested you are in academic theory, I've posted another link below. The theory is that the discount from NAV has three main components.  The management fee, the illiquidity of the portfolio and the expertise of management in providing bells and whistles, such as leverage, dividend capture, options activity, hedging etc.  The higher the fee, the greater the discount, the harder the portfolio would be for a retail investor to buy directly, the less the discount. For an equity CEF with normal fee of 1.25%, the discount should be around 10-12%.  For a floating rate note, the discount is maybe 0-5%.

CEF prices fluctuate significantly around the "norms."

Pricing study 

chamois:

Depending on how interested you are in academic theory, I've posted another link below. The theory is that the discount from NAV has three main components.  The management fee, the illiquidity of the portfolio and the expertise of management in providing bells and whistles, such as leverage, dividend capture, options activity, hedging etc.  The higher the fee, the greater the discount, the harder the portfolio would be for a retail investor to buy directly, the less the discount. For an equity CEF with normal fee of 1.25%, the discount should be around 10-12%.  For a floating rate note, the discount is maybe 0-5%.

CEF prices fluctuate significantly around the "norms."

Pricing study 

Thanks, Chamois. My browser wasn't able to download the entire study--graphics were missing, as well as the entire conclusion--so I only skimmed it. From what I could see, it doesn't explain the observed price flux very well--and whatever its virtues in mathematical modeling, they are lost in the density of the presentation. Your summary explanation is better! 

The theory is unsatisfying because: 

1. I don't see how a 1% fee becomes a 10% discount. Did the study examine actual fee structures and discount rates, or is this just conjecture? If the management doesn't add value, then the fees are a drag on the demand; but that would show in the NAV, not the discount rate.

2. If liquidity is the added value, then a discount could occur when liquidity decreases, i.e. when trading volume diminishes. Was this studied? Even if this does occur, it only explains lack of premium, not deep discount.

While researching another CEF, I happened across the transcript of the fund manager's conference call with professional/institutional investors. The professional investors had pretty much the same questions I do, so I feel much less foolish! If there is anyone who really understands this market, I guess they are pretty well hidden. :-)

Aalan 

I think the basic reasons for the amount of CEF discount are simpler than the academic discussions suggest.  With mutual  funds, an investor is forced to pay the daily NAV as measured at market close.  For Index ETF, the situation is much the same, because arbitrageurs keep the market price at NAV, even though traded in the secondary market.

Only with CEF, do investors get to inflict revenge for management fees by setting a market price significantly below the fund's asset value.  The ratio is roughly 1:9 in the US, more in some other markets, eg UK CEF.

When the  retail investor has little alternative but funds to buy relatively illiquid securities  or securities which must be bought in prohibitively  large quantities, h/she is forced to pay more, reducing this discount.  Favored sponsors and managers may attract investors believing they can do better than they, also reducing the discount.

Thus, the pricing paradigm is NAV minus the management fee ratio plus the illiquidity factor plus sponsor expertise, resulting in a net typical discount for each CEF asset class. 

These typical discounts can be found in the addenda to the academic studies or at etfconnect.com simply by measuring the visual or tabular displays.  It is important to make this measurement over a multi-year period eliminating the first few months after fund inception. 

The usual CEF practice then is to buy only when the discount is at or bigger than normal and sell only when it is less.  The reason for the excess variability about these norms is the variance of CEF (retail investor) sentiment vis a vis that of the  direct owners of portfolio holdings, who are largely insitutional.  That variance is sometimes referred to in studies as CEF "investor irrationality"  Best wishes!

chamois:

I think the basic reasons for the amount of CEF discount are simpler than the academic discussions suggest.  With mutual  funds, an investor is forced to pay the daily NAV as measured at market close.  For Index ETF, the situation is much the same, because arbitrageurs keep the market price at NAV, even though traded in the secondary market.

Only with CEF, do investors get to inflict revenge for management fees by setting a market price significantly below the fund's asset value.  The ratio is roughly 1:9 in the US, more in some other markets, eg UK CEF.

Thanks, Chamois, that is easy enough to understand.

The other zinger I've run into is the practice of distributing dividends and deducting the distribution from the NAV, so there's no advantage to buying before or after the distribution date. Fair enough, but if the market follows the NAV+distribution return (which would be rational), it complicates the discount chart, doesn't it?

Whew... it makes me dizzy. No wonder most people stick to open-ended funds!

aalan 

Hi again.  Theoretically on the ex-dividend date, both the NAV and the market price should drop by the amount of the distribution.  That may not happen in actuality upon the market opening, depending on the first sale.  The amount of the distribution represents an asset transferred from the fund's balance sheet to the shareholder, so a recent buyer is just getting h/her money back, usually in taxable form.

The discount can often increase temporarily  when shareholders wait until xd to sell in order to capture the dividend. 

Unfortunately, RIT and RNP appear to be rolling over on the dailies.  Perhaps we anticipated an end to the RE chi-chi a bit too soon.  Perhaps, like the famed groundhog, RE has reared its head, but decided the long winter hasn't ended quite yet?

Dick