The fund I’m talking about is called a “closed-end fund.”
I won’t get into the details of the structure. All that’s important for you to understand is the share price of a closed-end fund can trade at a premium, or a discount, to its “net asset value.”
Net asset value (or NAV) is simply the market price of the assets in the fund (what you would get if you simply sold those assets on the open market), and deducted any liabilities owed by the closed-end fund.
In this case, the NAV is the quoted share price of the blue-chip stocks the fund holds, minus a small number of liabilities owning.
And today, this fund is trading at a 22% discount to its net asset value – just 1% point shy of its widest discount ever, which was 23%. The discount has just started to narrow.
A discount this big rarely happens… especially considering the high-quality, liquid stocks this fund owns.
Right now, shareholders in this fund are incredibly bearish. They’ve lost faith in the fund manager’s ability to outperform the market after a recent bout of underperformance. And some of them are selling their shares at any price.
But the selling is way overdone. And we’re going to swoop in and buy a basket of blue chip stocks at a huge, 22% discount.
Oh, the manager of this fund happens to be one of the most prolific money managers in recent history.
And the huge and persistent discount in his fund is a MAJOR black eye for him.
By selling their shares at a discount to NAV, shareholders are saying this guy can’t cut it as a fund manager. And they’re willing to take a big loss to break free.
To be honest, I don’t really care too much about this guy’s ability to manage this portfolio. I’m only worried about buying high-quality assets at big discounts.
In this case, I know exactly what the assets are, exactly what they’re worth and exactly what I’m paying for them.
All the fund manager has to do is sell shares of the stocks he owns on the open market at their current prices for us to make double-digit gains.
And while he doesn’t intend to take that step (at least not yet), the manager has already taken several steps to close the discount. And the best is yet to come…