Unveiling the Cause of NAV-Discounts of Swedish Closed-End Funds

Abstract

Closed-end funds (CEF) have long been a crucial intermediary in the Swedish financial market by providing relatively inexpensive investment opportunities through their portfolio of public and non-public securities. Interestingly, although CEFs worldwide have been traded at a value below the cumulative value of their underlying portfolio, i.e., at a net asset value discount, this valuation discrepancy has begun to converge for Swedish CEFs while their investments consequently yielded positive returns. There is an incidence of research on why valuation discrepancies occur, but there is yet no theoretical consensus as to what that is. Consequently, this study further delves into the cause of NAV-discounts in a Swedish setting, by emphasizing how multifaceted information on CEFs is interpreted and subsequently valued by investors in terms of NAV-discounts, or premiums. Specifically, derived from linear regression analysis, with the use of panel-corrected standard errors, the study indicates that portfolio concentration, past performance, and dividend yield all have a negative effect on NAV-discount, while increased ownership concentration contrarily is positively associated with NAV-discount - in line with expectations and previous research. Oppositely, the expected negative effect of the proportion of non-public holdings could, conversely, not be detected as the study contrarily indicated its positive effect on NAV-discount. Thus, although the study provides some clarity to the otherwise discorded and US-centric research landscape, it further accentuates its ambiguity.