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Fund Spy

When Is a Discount Really a Discount?

A closed-end fund at a discount isn't necessarily worth buying.

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In a recent Fund Spy column, I alerted readers of the dangers of buying a closed-end emerging-markets fund selling at a steep premium (that is, when its share price is higher than its net asset value). The main risk there--besides all the usual risks of owning an emerging-markets fund--is that the premium could collapse, meaning that the fund's share price could fall or post only a meager rise even if the market was rallying and the portfolio itself was shooting upward in value.

For the most part, I wrote, only if a fund is selling at a historically deep discount is it worth considering. That raised one question from a reader worth following up on. And as I looked back at the column, it became clear there was more to say than space had allowed to help investors understand how to put premiums and discounts in context. (Note: For a basic explanation of premiums and discounts, see the first column.)

Where to Find Out?
One reader pointed out that while the first column suggested looking to see if a discount was historically deep--by which I meant in comparison with the fund's own history of discounts and premiums--it did not explain where to look for that information. The answer: The best place to look is right here on Morningstar.com. When you type in the ticker for any closed-end fund, its current share price and NAV, and the consequent discount or premium, are listed at the top right of the Snapshot page. That discount is typically drawn from the previous day's (or previous Friday's) closing share price and NAV, because funds usually don't make public their NAVs as they shift during the trading day. Although the premium or discount typically won't change by a meaningful amount during one day, make sure you still keep that in mind when evaluating these figures.

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.