The World at a Discount: The Case for Closed-End Fund Investing
Closed-end funds (CEFs) can trade at a discount to net asset value (NAV), creating opportunities for active managers to add alpha through market inefficiencies while being diversified across investment style and underlying holdings.
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Key takeaways
- The CEF market is unique in its structure and investor profile. We believe inherent inefficiencies are likely to persist and provide opportunities.
- Using an institutional-quality approach to capitalize on CEF discounts may allow for outperformance, improve risk-adjusted returns, and add diversification.
- We see active CEF investing as a hidden gem that may help boost institutional investors’ portfolio investment efficiency.
Executive summary
Why CEFs may offer a different opportunity
Finding durable market inefficiencies is a central objective of active investing. CEFs represent a distinctive opportunity because they often trade at prices below their NAV. Unlike mutual funds and most exchange-traded funds (ETFs), CEFs do not have an efficient mechanism to keep market prices closely aligned with NAV. As a result, investors may be able to gain exposure to underlying assets at a discount, creating a potential source of value that differs from traditional active management approaches.
Capturing discounts and potential alpha
A key feature of CEF investing is the tendency for discounts and premiums to fluctuate over time. Allspring believes these cyclical movements can create opportunities for active managers to generate alpha by identifying funds whose discounts have moved meaningfully away from historical norms. In addition to benefiting from underlying asset performance, managers may seek to capitalize on discount narrowing; relative-value opportunities between similar funds; and corporate actions such as share buybacks, tender offers, or enhanced dividends that can help unlock value.
Diversification through a fund-of-funds structure
Allspring's CEF strategies use a fund-of-funds approach designed to maintain benchmark-like exposures while reducing unintended risks. By investing across dozens of CEFs, the portfolios gain exposure to hundreds to thousands of securities spanning regions, sectors, and investment styles. This broad diversification may help mitigate the impact of individual securities, sectors, or countries on overall portfolio performance while preserving desired market characteristics.
The case for institutional investors
Allspring has managed CEF strategies across equity and fixed income markets for more than two decades. We believe the CEF market structure, investor composition, and relative inefficiency may continue to create opportunities for specialized active managers. By seeking to exploit persistent discounts, discount volatility, and governance-related catalysts, active CEF strategies may appeal to institutional investors seeking differentiated sources of active risk and return. Allspring has a strong long-term track record across the suite of CEF strategies.
All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to
numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics.
This material is provided for informational purposes only and is intended for professional/institutional investor and qualified client use only. Not for retail public use.
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