Confessions Of A Closed-End Fund Bargain Hunter

Retail buyers have a poor grasp of closed-end investment companies. That creates opportunities for Florida money man ERIK HERZFELD.

- William Baldwin

Classical economics: All actors are rational. Stocks are efficiently priced.

Behavioral economics, per Nobelist Richard Thaler: Investors' decisions are warped by emotion and ignorance. Prices can get out of line.

Count Erik M. Herzfeld, a money manager specializing in closed-end funds, in the Thaler camp. He aims to buy when fund shares trade at an irrationally low percentage of liquidating value and sell at a high percentage. Unlike mutual and exchange-traded funds, closed-ends don't do redemptions, and their prices are a matter of investor whim.

"Big discounts and big premiums. It's behavioral," Herzfeld says. "No one reads prospectuses.” Or rather, he reads and retail investors don't.

Exuberant buyers have (as of mid-September) pushed the price of Gabelli Utility Trust to a 120% premium over the value of the stocks it owns. Evidently they're mesmerized by the five-cents-a-share monthly dividend, not understanding that, at an annual 20% of the fund's net asset value, the payout is not sustainable. Nor have they fully absorbed how each dividend dollar they joyfully pocket has cost them $2.20, causing an instant $1.20 loss.

Herzfeld's clients, who have entrusted $750 million to his Miami Beach firm, do not own that Gabelli fund.

They do own shares of Central Securities Corporation, a wallflower that trades at a 19% discount to net assets. Exuberance for this fund died down soon after it opened its doors in 1929, a few weeks before the Great Crash.