One of the main benefits of investing in closed-end funds is taking advantage of the discounts and premiums of these investment structures. The funds aren't asset classes themselves, but are wrappers for other assets. That said, these discounts/premiums can be exploited due to share prices trading below or above the net asset value per share.

A fund trading at a premium doesn't always necessarily mean it is expensive, as looking at relative discounts/premiums can play a greater role in a reversion to the mean play. Being able to pick up a position in a fund that is trading at an abnormally large discount can provide an added advantage to the potential upside.

With that said, today, I wanted to look at two closed-end funds that are currently trading at large double-digit discounts. That includes the BlackRock Enhanced Equity Dividend Fund (NYSE:BDJ) and Special Opportunities Fund (NYSE:SPE). SPE is a bit unique in that the fund itself trades at a wide discount, but it also has a sleeve of its portfolio invested in other CEFs that trade at discounts as well.

BlackRock Enhanced Equity Dividend Fund

• 1-Year Z-score: -0.09
• Discount: -10.51%
• Distribution Yield: 8.25%
• Expense Ratio: 0.86%
• Leverage: N/A
• Managed Assets: $1.68 billion
• Structure: Perpetual

BDJ's primary objective is to "provide current income and current gains." The fund intends to achieve this by "investing in common stocks that pay dividends and have the potential for capital appreciation." They concentrate on dividend-paying stocks with "80% of its total assets in dividend-paying equities."

In our prior update, we noted that the fund's discount was attractively wide representing a fairly compelling opportunity for investors looking to initiate a position. The fund has provided some total returns for investors, which includes its distribution during this time. However, the discount on this fund actually widened a touch further, which keeps it an interesting choice for investors considering adding a covered call fund to their portfolio.

The fund's discount continues to trade at an abnormally large double-digit discount. Though the fund admittedly regularly has traded at a discount for most of its life.

While the discount is never guaranteed to close, it at least suggests that further discount widening from this level has been historically rare.

Further, this is one of the many BlackRock CEFs that has adopted a discount management program. This was adopted as an agreement with Karpus Investment Management. There are going to be four "measurement periods" where if the funds trade at an average discount of wider than 7.5%, they will conduct a tender offer. The tender offer is rather small in that each will be repurchasing 2.5% of outstanding shares, but it will be done at 98% of NAV.

While this was an agreement struck with Karpus, Saba Capital Management, another activist group, has been quite hostile with a number of BlackRock's other CEFs. So, while BDJ wasn't necessarily a direct target of Saba or even Karpus, this fund was an indirect beneficiary. With that, while the fund may never see its discount reduce again, there is at least an opportunity to capitalize on this discount should it remain wide.

While it is a small tender, being able to cash out at 98% of NAV is still enticing. If all four periods are triggered, an investor could see a minimum of 10% of their shares repurchased. As is often the case, not all investors will participate, so there is usually an even greater number that will be accepted for the tender.

BlackRock had been conducting repurchases in their CEFs while they had been trading at large discounts. However, with the tender offer, it is a more tangible and direct way for shareholders to participate.

This fund uses the Russell 1000 Value Index and MSCI USA Value Call Overwrite Indexes as its benchmarks. So, instead of a tech-heavy portfolio that is generally run by most broader market-based funds, this fund can be a great diversifier due to its value-oriented tilt. The fund's largest exposure is to the financial sector, followed by meaningful weights of healthcare, industrials and energy.

In terms of the fund's distribution, it might not be the highest out there in the CEF world. However, thanks to the fund's significant discount, what the fund has to earn is actually smaller than what investors receive when investing today. The fund's NAV rate comes to 7.45%, but the market distribution rate is a bit more juiced up at 8.38% due to this sizeable discount.

No distribution is ever guaranteed, and as is normally the case with equity focused funds, they will require capital gains to continue to fund the payout. That said, with a rather modest distribution rate, it doesn't look to be in jeopardy at this time. The fund is also starting to get quite the solid track record of having year-end specials thanks to realizing outsized capital gains over the last several years now.

Special Opportunities Fund

• 1-Year Z-score: 1.87
• Discount: -15.77% (based on 6/28/2024 reported NAV)
• Distribution Yield: 8.75%
• Expense Ratio: 1.93%
• Leverage: 26.33%
• Managed Assets: $220.2 million
• Structure: Perpetual

SPE "employs an opportunistic investment philosophy with a particular emphasis on investing in discounted closed-end funds, undervalued operating companies, and other attractive special situations including risk arbitrage and distressed securities."

This is a fund managed by Bulldog, another activist group, and it was actually like Saba's two closed-end funds in that SPE was previously a fund taken over by Bulldog. The fund provides a NAV update weekly instead of daily, despite investing in a portfolio that is mostly liquid. The fund uses preferred as its leverage and this is a convertible preferred that is publicly traded (SPE.PR.C), which is why there is a diluted NAV reported as well.

SPE is more of a unique fund, and one we haven't touched on for nearly a year now. Not that it isn't a fund worth revisiting, but there just isn't generally much to update on this fund. Aside from the less transparency of only reporting NAV weekly, making updates more difficult is that they provide limited update material of their own.

This fund has implemented an 8% managed distribution policy that resets annually. Based on the current distribution rate of 7.55% on the NAV, that would see an increase next year if this continues to hold. Once again, thanks to the meaningful discount the fund trades at, the actual market price distribution rate comes to 8.79%.

Outside of the mandatory regulatory requirements that are the annual, semi-annual and quarterly N-PORT SEC filings, there are no monthly or quarterly updated fact sheets or information available on their site.

To get an overall breakdown of how the fund is invested more broadly, we have to go back to the fund's last annual report. This was current information as of December 31, 2023, with the next semi-annual report due sometime in September, which would be information as of June 30, 2024.

With that, investing in this fund, we are generally left more in the dark, or at least without the helpful resources that we often have for closed-end funds. It can require a bit more trust in the management of this fund—and perhaps that's why such a large discount is a regular occurrence for this fund as well.

The fund was taken over in 2010, so information prior to that for the fund isn't all that relevant. That being said, we are currently trading at a wider than usual discount based on the fund's last decade average.

What makes this fund a bit more interesting is not only the fund's discount itself, but that the largest allocation of this fund is to other closed-end funds. Those also tend to trade at some significant discounts.

When looking at the largest holdings of the fund last time, we had SRH Total Return Fund (STEW), General American Investors (GAM) and Texas Pacific Land Corp (TPL).

Looking back at the latest N-PORT filing, for the period ended March 31, 2024, we can confirm these are still positions and still indeed large positions for the fund. STEW was 10.3% of the net assets of the fund, with GAM at 9.25% and TPL at 4.68% weightings.

Positions that have now become larger for the fund over TPL include DWS Municipal Income Trust (KTF) at 6.5%, CION Investment Corp (CION) at 6.06% and Central Securities Corp (CET) at 5.62%, all weightings as percentage value compared to net assets of the fund.

With that, we have STEW, GAM, KTF and CET as traditional closed-end funds and then CION as a BDC. BDCs are a type of CEF and, similarly, can trade at discounts/premiums. Here is a look at the CEF discounts currently:

And a look at CION's discount/premium history:

CION is currently trading at an over 24% discount to its last reported NAV of $16.05. BDCs report NAVs quarterly, so there is some estimating and guesstimation that would be required between reporting periods.

The shallowest discount here is KTF, but it is for good reason, as the fund will be liquidating in 2026.

The discount on discounts here is the main benefit of the fund, and it also helps given that with a heavy sleeve of other CEFs being held, there are also fees on fees. A further consideration, and risk to consider, is the added volatility of leverage on leverage as well, with several of these underlying investments as well.

Conclusion

Closed-end funds can trade at discounts for a number of reasons; however, those with abnormally large discounts can present potential opportunities to exploit. Today, we took a look at BDJ and SPE, which are currently trading at larger-than-usual discounts. In the case of SPE, they are also invested in a large basket of underlying CEFs that are also trading at sizeable discounts. Both of these funds also provide a monthly distribution to investors, which makes it easier to be patient and hold these names over the long term.