Maury Fertig of Relative Value LLC says his strategy would be to buy closed-end funds at a discount if Washington fails to manage the fiscal cliff. A market fall between now and the end of the year could create opportunities.
"If you see another panic like a few weeks ago [when stocks dropped on fears over the fiscal cliff], look for bargains in closed end funds," he says.
Data show that the end of the year is nearly always the best time to buy closed-end funds, he says. They tend to recover in the New Year. The funds are publicly traded, like stocks, and unlike mutual funds, their trading value is not adjusted daily to reflect net asset value. That means they can fall to a discount to asset value.
[See the 10 Biggest Closed-End Mutual Funds.]
Royce Value Trust (RVT), a 25-year-old closed-end fund that invests in small- and mid-sized companies, recently traded at a 13 percent discount to its assets, even though it normally stays near its net asset value. It yields 7.3 percent. Alliance Bernstein Income (ACG), a multisector bond fund that holds mostly investment-grade assets, has dropped to a 9 percent discount to assets, pushing its yield to an above-normal 5.6 percent. The Eaton Vance Tax Managed Equity Fund (ETY) has also dropped to a double-digit discount. It uses a strategy of buying covered calls on relatively safe blue chips. Its price now reflects a missed dividend, but its payment record has been steady in the past and "they have said they have no plans to cut the dividend in the immediate future, " Fertig says.
None of the fund managers anticipate a breakthrough deal in the current talks. But the pressure could grow and stocks could fall if Congress goes any length of time into the New Year without some semblance of one.
"The fiscal cliff is the biggest thing for the market in the short term," says BlackRock's Cassese, "If we can't get a resolution, there is likely to be a recession in 2013."