Taking an institutional toolbox to the typically retail closed-end fund market is providing institutional investors with an entry point into an obscure asset, according to Scott Eldridge, senior portfolio manager of closed-end fund strategies at Allspring Global Investments.
During a session at the Canadian Investment Review’s 2024 Defined Benefit Investment Forum, he noted the low appetite for closed-end funds represents an opportunity for significant discounts. It provides investors with the beta of the underlying funds, as well as the alpha of the potential discount compression.
Read: 2023 Defined Benefit Investment Forum: Managing liquidity through listed assets
“Where we are today is at — or near — the widest [discount], which means the best opportunity to get into the space that we’ve seen since the great recession.”
While closed-end funds share similar characteristics to open-end funds, they also offer flexibility to buy and sell positions through daily trading markets, said Eldridge. “It’s subject to the laws of supply and demand, which means the price of that fund will behave independently sometimes from the behaviour of the underlying shares.”
In addition, the funds offer institutional investors diversity in an equity landscape that’s growing considerably narrow with the biggest companies dominating value, he said, noting research has found closed-end funds carry a $28.4 billion price tag in unclaimed shareholder value.
Read: 2022 Top 40 Money Managers Report: The risks for DB, DC plan sponsors around alternative investments
“These strategies tend to play very nicely as a complement within a portfolio of what investors are trying to achieve with their more active managers.”
According to Eldridge, the reasons closed-end funds are typically associated with retail investors is the value sizes, strategies that don’t lend themselves to scalability and capacity constraints. Despite this seeming mismatch, he said he enjoys the work required by an investor to engage with closed-end funds.
“There is a qualitative element that I think is important to the success of these strategies.”
Currently, the valuation gap found in closed-end funds comes from macroeconomic factors, including higher inflation, higher interest rates, a destabilizing geopolitical conflict in Eastern Europe and a narrow stock market.
“Not only is it an attractive entry point from a valuations standpoint, [but it’s also] an attractive entry point because when markets are struggling like this, when markets are cheap like this, it’s when the activist opportunities become the most prevalent.”
Read more coverage of the 2024 DB Investment Forum.