Subscribers who have been with me for a while know that I have a general negative opinion of closed-end funds (CEFs). I have heard them called the Junkyard of Wall Street. That said, I have added a few CEFs to the Dividend Hunter portfolio when I found ones with compelling potential. Currently, there are two CEFs out amongst the 27 recommended investments.
My first issue with CEFs is that I don’t have the time to dig through the 368 CEFs listed on the CEF Connect website to dig a few nuggets out of the manure pile. Over the years, at the request of subscribers, I have dug into quite a number of closed-end funds and found very few that I thought were worthy of inclusion in the Dividend Hunter portfolio. The two currently recommended CEFs also came from subscriber requests. (My subscribers are the best!)
The other issue with CEFs is pricing. In the closed-end fund world, fund sponsors neither redeem nor issue shares. This means the market price can vary significantly from the net asset value (NAV). CEFs can trade for a premium to NAV or at a discount. The differences can be extreme.
For example, the very popular PIMCO Dynamic Income Fund (PDI) has traded at a premium of as much as 17.6% to NAV. The premium investors pay for shares is about 20% more than the shares are worth.
A CEF trading at a discount can be viewed as an opportunity to buy shares at a price below their intrinsic value. However, a CEF with a widening discount can be a problem.
I am having that issue with FS Credit Opportunities Corp. (FSCO). This CEF is a Dividend Hunter portfolio recommendation. With the recent fears about private credit, the FSCO share price has moved to a massive 25% discount to NAV.
The FSCO NAV is extremely stable, so the share price decline is solely due to investors bailing out on this CEF. The widening price gap means either that investors know something is going wrong with the fund or that it is unfounded fear selling. Either way, if you want to sell out, you do so at a terrible discount to the NAV.
Fortunately, the FSCO management team puts out an annual report with management commentary. I recently reviewed the 2025 results, and the fund is in good shape as of now. The deep discount can be viewed as a buying opportunity.
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