Narrowing discounts should not influence how closed-end funds are invested, according to Karen Sabath, managing director of BlackRock Financial Management with $2.9 billion in 11 closed-end municipal funds.
"From a day-to-day portfolio management point of view, premium or discounts to NAV shouldn't influence management" said Sabath.
"It's not written that the fund should trade at a certain premium or a certain discount.
"If the investment objective is to return a certain dollar amount at the end of a certain amount of time, that's got to be the number one priority of a portfolio manager, and, quite frankly, we can't control the stock prices at all," she added.
Although Sabath explained a number of her closed-end funds have experienced narrowing discounts in the last year, she has also "enjoyed average premiums to NAV for a number of funds" for periods of three to eight years.
She stressed that investors should try to remember that a discount need not be permanent or enormous and that the market continues to move - in both directions.
Sabath said that open-end funds are not all that different from closed- end funds when it comes to investor decision-making.
"When you see dramatic outflows in open-end funds - if there are net outflows that means there's more sellers than buyers - lower balances for mutual funds."
"In the case of closed-end funds, it's the same thing, more sellers than buyers means a greater discount to NAV - or more downside pressure on price than upside pressure - and it manifests itself now in the greater discounts to NAV," she said.
