Appeal of Closed End Fund Valuations

Scott Burns: Checking in on closed-end fund valuations. Hi there. I'm Scott
Burns, director of closed-end funds and ETF research with
Morningstar. Joining me today is closed-end funds strategist, Mike
Taggart. Mike thanks for joining me.

Mike Taggart: Thanks for having me.

Scott Burns: Over the past couple of weeks we've seen a general market decline.
And then yesterday we had the market crash of 2:45 that is PM
Eastern and then the recovery. With those general trends, what
have we seen in the closed-end fund? What was the state of closed-
end fund market before yesterday?

Mike Taggart: Just over all of the 621 closed-end funds out there, what we had
seen is for the last say, month they were all trending over towards
the overvalued space. Their discounts and premiums were trending
higher like and in some cases significantly higher on a statistical
basis, than their three-year average discounts or premiums.

After yesterday and actually over the course of the last week, we
have seen them trend significantly and quickly to the left toward
and backwards in more normal state. But for the first time in a
month, we are actually seeing some funds pop up as being
statistically significantly undervalued.

Scott Burns: So we managed to go from a state of overvaluation to
undervaluation. What do you think is really driving that?

Mike Taggart: I think a lot of it is these discounts and premiums are the share
price relative to the net asset value. A lot of times you have
investors who are just trying to get out of the market. They are
anticipating further downside or further upside or whatnot, and that
motivation or that anticipation isn't reflected in the underlying
shares of the fund's portfolio. So the net asset value doesn't fall
quite as much as the share price does because of market behavior.

Who can blame people yesterday for hitting the panic sell button?
Hopefully they didn't do that, but in some cases that happens. A lot
of times, what you'll see on overseas markets is maybe the local
market for overseas closed-end funds, the local market might start
to stabilize after a sell-off and might even start to come back a
little bit, but investors in the U.S. aren't going to jump right back in
immediately.

Scott Burns: So that's a function of the NAV-going up but the interest in the
fund still remaining pretty dormant.

Mike Taggart: Right, exactly.

Scott Burns: It sounds like we went from a period where it was hard to find
opportunities to a period where things are starting to look a little
better on the opportunity front in the closed-end fund space?

Mike Taggart: Yes, we like to look at things on a three-year basis right now
because we think that investors should take a three-year investment
horizon. There are starting to be some opportunities in the space.
Not really yet in the fixed-income space, where we think that we're
statistically significantly undervalued, but they're coming down,
too. I was going to say for current investors, "Yikes!" But it's
possible that even there in the next few weeks if things persist like
this that we're going to start seeing some opportunities there as
well.

Scott Burns: All right. Thanks for the update. I'm Scott Burns, Director of
Closed-end Fund and ETF research with Morningstar. For this and
other ETF and closed-end fund news and information, please check
out Morningstar.com's ETF and closed-end fund tab.