Paul Price: 20 Years of Outperformance (from a Fund You've Never Heard of)

When you think “big picture” we all have the same investment time horizon. Everybody has to do something with their money for the rest of their lives. Once you get a handle on that, financial planning gets a lot easier.

Over the long haul, stocks beat bonds, and bonds earn more than cash equivalents. The best returns of all have been generated from small-cap equities.

Knowing that, who wouldn’t want at least a nice portion of their investable assets in a mutual fund that specializes in this area of the market?

Royce Funds started the closed-end Royce Micro-Cap Trust (NYSE:RMT) on December 14, 1993. Unlike open-end funds, closed-end shares trade like individual company stocks. They have stock symbols and can be bought or sold anytime the market is open.

RMT’s performance has been nothing short of stellar since inception. Through the end of 2013, it had handily beaten its benchmark, the Russell-2000 Index, over every period ranging from one to 20 years.

Investors who bought RMT in late 1993, and simply left it alone, experienced double-digit total returns over the next two decades. That is quite remarkable considering that period included the tech/internet bubble of 2000, the 9/11 terrorist attacks and the horrific 2008-09 stock market crash.

Patient and stalwart fund investors turned every $10,000 into more than $95,000. That’s the stuff dreams are made of. It required only one decision: Buy RMT and stick with it. Just imagine the total today for people that added more dollars along the way.

Closed-End Funds (CEFs) Offer Distinct Advantages

• Managers: Not subject to pressures from cash additions or redemptions
• CEFs are often available at discounts to NAV (net asset value)
• CEFs can be bought or sold intra-day, like ETFs
• CEFs are margin eligible if held in street name

Why don’t you hear more about them? Once they have begun trading, nobody has a vested interest in promoting them. Brokers are paid to sell funds that have sales charges. That’s why they almost never recommend this type of investment.

At many discount brokerage firms closed-end funds can be traded for as little as $1 per hundred shares. Royce Micro-Cap and other closed-end offerings are shown in online stock tables and in end-of-the-week summaries in Barron’s or in Monday’s edition of the Wall Street Journal.

Despite superior long-term performance, a few weeks ago RMT was available for an 8.3% discount to its net asset value. 52-week shareholder return through Oct. 3, 2014, was a very respectable 14.3%.

Those with a “trading” mindset rather than a buy-and-hold mentality can use fluctuations in CEF’s premiums or discounts to NAV in the same manner that they use P/E ratios to judge buy and sell levels for individual stocks.

The Bottom Line

Higher discounts typically occur when markets are nervous. That allows for a double bonus when asset values recover and the market price reverts to a more normal relationship to NAV.

Closed-end shareholders always receive dividends based on full NAV, even if they purchase at discounted levels. That adds to the nominal yields on the funds’ underlying holdings. There are many high-quality, time-tested CEFs out there. In future articles I plan to cover some of my other favorites.