Managers Buying Shares of Own Closed-End Muni Funds

Managers and employees at closed-end municipal bond funds see bargains where few other investors do: their own funds.

Executives who manage closed-end municipal bond funds bought about 75,000 shares in the past two months, 16 times as many as they sold during the same period, according to the Washington Service, which follows insider transactions reported to the Securities and Exchange Commission.

The purchases come as closed-end muni funds wrap up a brutal year, in many cases posting double-digit negative total returns.

Returns on all bond funds have been hurt, of course, by surging market interest rates, which depress the value of older, lower-yielding bonds.

Closed-end funds have been particularly brutalized because of their nature: The funds differ from open-end funds in that they have a fixed number of shares outstanding. The price of a closed-end fund’s stock, traded on the New York Stock Exchange or other market, can diverge widely from the actual per-share value (the “net asset value,” or NAV) of the bonds in the fund’s portfolio.

In times of rising interest rates, when investors in general shun bonds, closed-end bond fund share prices can trade far below the true value of their portfolios.

Nuveen Insured Municipal Opportunity fund (ticker symbol: NIO), for example, closed at $12.06 a share on Monday on the NYSE. But the fund’s net asset value per share as of Friday was $14.09. So the stock sells for a 14% discount to the true value of the portfolio.

Steve Krupa, a portfolio manager at the fund’s parent, Nuveen Advisory Corp., on Nov. 30 paid $103,040 for 8,000 shares of Nuveen Insured Municipal Opportunity, bringing his holdings to 15,034 shares. The fund’s current annualized yield: 7.5%.

“This is a cheap asset class,” said Tom Fetter, who oversees about $7.5 billion as head of munis for Eaton Vance Management in Boston. He paid about $84,211 for 7,200 shares in Eaton Vance Municipal Income Trust (EVN) over the past three months, bringing his holdings to about 11,600 shares, according to the Washington Service.

The fund now carries a tax-free annualized yield of about 7.3%. But unlike many other muni funds, its shares have been trading for close to their true value.

Among California muni closed-end funds trading at sharp discounts, Nuveen California Municipal Value (NCA), at $7.63 a share on Monday, sells for about 18% less than its net asset value.

Morgan Stanley Dean Witter Insured California (ICS), at $12.88, sells for about 10% below its net asset value.

In choosing a closed-end fund, investors should be careful to review the fund’s dividend payment history and what’s in the portfolio.