Valuation of Closed Investment Vehicles

In the last two years we've seen an increase in the discounts to NAV of fixed-income Closed End Funds (CEFs), in this communication we lay out a methodology rooted in DCF to estimate what a "fair" discount to NAV is, an approach that can also be used for REITs investing primarily in MBS securities. The approach deviates from empirical "mean reversion" in that it does not use past measures of discount to estimate the fair discount. While empirical analysis based on previous valuations may prove useful at times, the validity of results is likely to be short lived. A change in leverage ratio, funding rates or the expense ratio of a fund or the least expensive substitute would lead to a shift in the in the maximum fair multiple to NAV.