Brett Arends at MarketWatch looked at closed-end bond funds trading at wide discounts, and in particular the funds run by Western Asset Management, where the former CIO's guilty plea and a shrinking asset base pushed discounts wider still. He asked what I am actually doing with them.
My position is that there are real opportunities in closed-end bond funds right now. Discounts to net asset value have been wide for most of the past two years, because rising rates and bond-market turmoil drove a lot of private investors out. For clients in retirement who need steady income, I have been putting some of these funds to work.
The Wamco situation is different. I have reviewed their major closed-end offerings, and the discounts widened sharply after the Ken Leech news broke, which is exactly what you would expect when a manager is in the middle of a criminal investigation and assets under management have dropped around 40%. A discount that widens because of trust issues is not the same as a discount that widens because of rate pressure. One is a valuation opportunity. The other is a signal you need to understand before you act on it.
I am not rushing in. I want to see how the firm handles the fallout and whether anything systemic turns up before adding that exposure for someone counting on the income.
Buying a discount just because it is wide is the wrong instinct.
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