By Charles Sizemore
Finally, we get to the discount/premium to NAV. It's normal for these funds to trade at modest discounts to their NAV.
It's when that discount gets wider (or smaller) than usual that you need to stand up and take note. Today, the discounts are near their widest points in years.
To better explain what I'm talking about, let's look at an example.
Eaton Vance Limited Duration Income Fund /zigman2/quotes/201497040/composite EVV +0.66% owns a portfolio of bonds and bank loans and yields a very respectable 8.9%. Its portfolio has lost value this year as bond yields have crept higher, yet its market price has fallen much faster.
As a result, EVV is now trading at its deepest discount to NAV in five years: 12.7%. As recently as two years ago, EVV was trading at a 4% premium to NAV.
What kind of potential returns may we expect here? Let's do a little back-of-the-envelope math.
We have the current yield of 8.9%. Assuming no improvement in NAV, but that the fund's discount improves from the current 12.7% to a more reasonable 7%, you'd tack on another 5%-6%. That gets us to just shy of 15% total returns. And if the underlying NAV rallies — and I expect it will — we can potentially get to total returns of 20% pretty quickly.
Are those amazing returns to write home about? No.
But are they a lot better than what I expect the broader market to deliver over the next 12-18 months? Absolutely.
Disclosure: Sizemore is long EVV.