Lesson A6.2 · 2 of 5 · Special situations
Closed-end funds and the discount to NAV: how it works, with examples
A closed-end fund, called an investment trust in the UK, has a fixed number of shares that trade on an exchange at a price set by the market, not at the value of its assets. The gap is the discount (price below NAV) or premium (above NAV), and it can stay wide for years.
Terms in this lesson
- Net asset value (NAV)
- What one unit of a fund is really worth, after its liabilities are subtracted.
- Stock buyback
- The company buys its own shares on the market, so each shareholder's slice gets bigger.
- Mutual fund
- A fund where you buy units directly from the manager, at a price calculated daily.
What is a closed-end fund and how does it differ from an ETF
The SEC describes closed-end funds as one of the three main types of investment company it regulates. They sell shares in a public offering, after which the shares trade on an exchange at market prices. The fund is not required to buy them back. In the UK the same structure is known as an investment trust.
Closed-end funda fixed number of shares
- Shares are bought and sold on the exchange, between investors
- The manager need not sell assets when investors leave
- The price can sit well below net assets (a discount) or above (a premium)
- It may borrow, which magnifies both gains and losses
Open-ended fund and ETFthe number of units changes
- Units are created and redeemed as demand changes
- The price stays tied to the value of the assets
- When large sums leave, the fund has to sell assets to pay out
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Create a free accountHow to calculate the discount or premium to NAV
Definition
The discount formula
Discount (or premium) = share price ÷ NAV per share - 1
A negative result is a discount, a positive one a premium. Example: NAV £1.00, price 85p: 0.85 ÷ 1.00 - 1 = -15%, a 15% discount. At a price of £1.10: +10%, a 10% premium.
The discount can work for you or against you. If NAV stays put and the discount narrows, the share price rises faster than the assets. If the discount widens, you can lose money even while the assets grow.
The closed-end fund puzzle: Lee, Shleifer and Thaler
Why would anyone sell £1 of assets for 65p? Charles Lee, Andrei Shleifer and Richard Thaler set out the problem in the Journal of Economic Perspectives in 1990: new funds come to market at a premium and move rapidly to a discount, and they ask why arbitrage does not close the gap. The SEC tells investors much the same: the price of closed-end fund shares typically falls straight after the initial offering, and the shares end up trading at a discount.
Journal of Finance, 1991
What did Lee, Shleifer and Thaler find?
Closed-end fund discounts track the mood of individual investors.
In “Investor Sentiment and the Closed-End Fund Puzzle”, the authors argue, with evidence supporting their predictions, that discounts on different funds move together, that new funds tend to be launched when existing ones trade at a premium or a small discount, and that discounts narrow when small company shares do well. Their explanation: both closed-end funds and small stocks are held mainly by individual investors.
A case study: the Fondul Proprietatea discount, 2011 to 2025
Average annual discount of Fondul Proprietatea’s shares to NAV per share, from the fund’s own figures: 55.7% in 2011, 50.1% in 2012, 40.7% in 2013, 30.9% in 2014, 29.1% in 2015, 32.1% in 2016, 28.1% in 2017, 29.5% in 2018, 29.4% in 2019, 21.1% in 2020, 5.7% in 2021, 21.6% in 2022, 22.8% in 2023, 34.3% in 2024 and 41.4% in 2025.
Fondul Proprietatea (FP), a closed-end fund listed in Bucharest and managed by Franklin Templeton, reports an average annual discount of 55.7% in 2011, 5.7% in 2021, then back up to 41.4% in 2025. To narrow it, the fund returned money to shareholders through dividends, returns of capital and buyback programmes: in 2025, under its 16th programme, it bought back 252,097,337 of its own shares. After it sold its Hidroelectrica stake (see the IPO lesson), shareholders approved on 18 August 2023 a special dividend of 1.7225 lei a share gross, 9.28bn lei in total, paid out of the IPO proceeds from 29 September 2023.
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: SEC, “Investor Bulletin: Publicly Traded Closed-End Funds”, 25 September 2020; Lee, Shleifer and Thaler, “Anomalies: Closed-End Mutual Funds”, Journal of Economic Perspectives 4(4), 1990, and “Investor Sentiment and the Closed-End Fund Puzzle”, Journal of Finance 46(1), 1991, pp. 75-109 (abstracts); Fondul Proprietatea, 2025 preliminary results presentation (average annual discount 2011-2025, to one decimal place), 2023 annual report (average discount for 2023: 22.8%), monthly reports at 31 August 2026 (NAV, share price, distributions, buybacks, holdings) and 31 July 2026; resolution of the shareholders’ meeting of 18 August 2023 and announcement of 22 August 2023 on the special dividend; AIC, press release of 1 June 2026 (Morningstar data); our own calculations.