I’ve dedicated my career to closed-end funds (CEFs) because, in a way, these high-yield investments saved my life: Using these funds to get an 8% income stream from my portfolio gave me the confidence to had to give up. academic work more than a decade ago.

I started writing about CEFs then, mostly out of wonder and confusion: Why weren’t these reliable income plays — which yield an average of 8.2% now — more popular?

Well, after more than a decade of talking to economists, bankers, fund managers, and other experts, I’ve come to realize that they MUST to be more popular, and that they would probably be after a major shock in the markets made them irresistible.

That hit came in 2022, a crash that drove many poorly informed retail investors out of the market. They have not returned and are holding their assets in cash:

Many of these scared investors went to money market funds. Even after the first quarter of 2024, when the S&P 500 fully recovered, this money is STILL aside.

Some of this money is from collected CEFs. But even so, the underlying asset values ​​of CEFs have continued to rise. This has fueled a recovery in CEF returns, which we can see in this chart, from our CEF Insider The Tracking Index, which shows the performance of CEFs across sectors, from high yield and corporate bonds to municipal bonds and equities:

However, retail investors are shying away, largely due to media-driven fear. In a situation like this, you usually see hedge funds and other activists come in to take advantage. After all, CEFs’ average discount to net asset value (NAV, or the value of their portfolios) has historically been around 5%, and today it’s lower – around 7%.

However, CEFs were down more than 9% a year ago, prompting activists to get in at the time. Now the story is entering a new phase: Discounts are shrinking fast, as we can see with PIMCO Dynamic Income Fund (PDI), a well-known (as CEFs go) high-yield bond CEF that’s a good benchmark for us here.

As I write this, PDI is trading at 11% premium to NAV, after trading at lower premiums and briefly at a discount in 2022, and even into mid-2023.

I pointed this out at the end of 2023, when PDI was trading at par (unusual for PIMCO funds, which typically trade at high premiums). Since that nominal valuation has turned into a double-digit premium, the fund has delivered a return of 17.4% — the kind of return you typically see from stocks, not bond funds like PDI:

When I first got into CEF, these types of trades were plentiful. But as of 2022, they are harder to find because many good funds remain extremely undervalued. Consider, for example, the discount/premium moves of another technology-focused CEF BlackRock Science and Technology Trust (BST).

See how BST remained deeply discounted in the mid-2010s? This was due to concerns about the Federal Reserve, inflation and recessions. But BST’s strong performance meant it received a premium valuation in early 2018, when the tech’s steady growth had continued for too long for investors to ignore.

Note that there was a drop in demand afterwards, due to another rate-driven panic in 2018. Then the pandemic made things worse in 2020, driving the BST to a new equilibrium: trading around .

Since this equilibrium still exists with many retail investors still shying away from CEFs, there is room for more premiums if they return. And there are signs that this is happening – mainly the fact that average CEF cuts have increased, as mentioned a second ago.

If BST rises another 10%, investors buying today could see roughly 13% capital gains (as of this writing) on ​​top of the fund’s current 7.9% yield.

Michael Foster is the Principal Research Analyst for The opposite perspective. For more great income ideas, click here for our latest report “Unbreakable income: 5 bargain funds with stable 10% dividends.“

Disclosure: none