Jamaican-listed closed-ended funds (CEF) are currently underperforming even with a recovery in their net asset value (NAV), which plummeted because of the economic turbulence triggered by the COVID-19 pandemic.

The pandemic has weighed on the performance of these CEF, such as QWI Investments Limited (QWI), Mayberry Jamaican Equities (MJE) and Sagicor Select Financial Limited (SELECTF), which have been among the most severely affected equities on the Jamaica Stock Exchange (JSE).

The decline has caused a falloff in the price of QWI, MJE and SELECTF, which invest in stocks listed on the JSE. Of the three equities, only QWI has equity holdings overseas, but its Jamaican holding represents 73 per cent of its total portfolio.

While stock markets locally and abroad have recovered some ground this year with both the JSE Main and Junior Market indices grown by 3.5 per cent and 24.2 per cent respectively year-to-date with the rebound translating into a marked improvement in the NAV of these equity CEFs. However, their stocks prices have yet to see a meaningful recovery.

NCB Capital Market assessment

NCB Capital Market has assessed that all three CEF are now trading at significant discounts to their NAV with the discounted range being between 22 per cent and 38 per cent. The stock price for QWI and MJL year-to-date has increased but not as much as their NAV.

For SELECTF both its NAV and the stock price have declined. Of note is the fact that the stock price has declined at a much faster pace. To assess a fund, its stock price should be reviewed in conjunction with its NAV, which reflects the true value of the fund to investors.

NCB Capital Market reports that in a perfect scenario, a fund’s stock price and NAV per share should be the same.  In its weekly market guide, NCB Cap Markets reports that the NAV of both QWI and MJE has been appreciating year-to-date but their stock prices are at discounts of 38 per cent and 29 per cent, respectively, while for SELECTF, the stock is trading at a discount of 31 per cent to its NAV.

The brokerage and equity outfit sought to explain the reasons for the significant discounts. NCB Capital Market argues that, “Perhaps the answer lies in poor investor sentiment and the level of uncertainty in the financial markets at this time, which may cast doubt on fund managers’ ability to sustain their current portfolio performances. Investors may still be cognizant of the risks that could materialize.”

Consequently, despite the improved NAV performance, investors may still be hesitant to increase their exposure to these funds. The result is that demand remains weak despite the significant value that appears to be on the table, given the huge discount at which the stock trades relative to the NAV.

Given the uncertainties in the market, NCB Capital Market is of the belief that CEF stock prices could continue to trade at a discount to NAV for some time, highlighting the lingering effect of the pandemic on the financial markets.