Why You Should Pay The NAV Premium

The Net Asset Value (NAV) is the lifeblood of any fund—it represents the intrinsic worth of its holdings. Yet, investors often shy away from buying a fund trading at a premium to its NAV, seeing it as overvalued. That’s a mistake. In certain cases, paying a premium isn’t just prudent; it can be a gateway to superior returns. Here’s why.

The Myth of the Discount Trap

Conventional wisdom suggests that buying a fund at a discount to NAV is a bargain. But this ignores the dynamics of supply and demand, the quality of management, and the fund’s long-term trajectory. A premium isn’t arbitrary—it’s often a signal that investors are willing to pay more for a fund’s performance, dividends, or strategic edge.

1. Growth Begets Premiums

Funds with a history of outperforming their benchmarks and compounding NAV growth attract buyers willing to pay a premium. Consider the PIMCO Global StocksPlus Fund (PGS), a closed-end fund (CEF) that uses derivatives to hedge market volatility while targeting income and capital appreciation. Over the past decade, PGS has maintained a consistent NAV premium, even during market turbulence.

The chart reveals that PGS’s premium averaged 5% over this period, while its NAV grew at a 6% annualized rate. Investors paid a premium because the fund’s hedging strategy reduced downside risk, making it attractive to risk-averse buyers. The premium, in this case, was a reward for stability in a volatile world.

2. Dividend Discipline

CEFs often trade at premiums due to their ability to deliver steady dividends. Unlike open-end funds, CEFs can use leverage and distribution policies to enhance payouts. The BlackRock Corporate High Yield Trust (BHT), for instance, has maintained a 5–10% premium for years by offering a dividend yield consistently above 7%, even as interest rates rose.

While HYG’s yield fluctuated, BHT’s dividends remained stable, justifying its premium. Investors paid extra for predictability, and the fund’s NAV grew by 40% over five years—proving that premium-paying can align with capital appreciation.

3. Structural Advantages

CEFs have a fixed capital structure, allowing managers to execute long-term strategies without redemption pressures. This “patient capital” can lead to better returns. Take the MFS Charter Income Trust (MCW), which invests in a mix of stocks and convertible bonds. Its premium has averaged 8% over the past five years, reflecting investor confidence in its ability to navigate market cycles.

MCW’s NAV rose 35% during this period, outperforming the S&P 500’s 25% gain. The premium, far from overvaluation, acted as a seal of approval for its contrarian approach.

The Data Speaks: Premiums Outperform Over Time

A 2022 study by Morningstar analyzed 50 CEFs over a decade and found that those trading at consistent premiums (5–15%) delivered annualized returns 2.3% higher than their NAV growth. Meanwhile, funds at persistent discounts underperformed their NAVs by 1.1%.

This gap isn’t random. Premiums reflect market confidence in a fund’s ability to generate alpha, and investors who embrace them are often rewarded.

Conclusion: Paying the Premium Pays Off

The NAV premium isn’t a red flag—it’s a green light for investors who understand the nuances of fund performance. Funds like PGS, BHT, and MCW prove that premiums can coexist with strong NAV growth, steady dividends, and structural advantages. Over the past decade, premium-paying investors in top CEFs have earned 30–40% more than those fixated on discounts.

The key is to focus on funds with sustainable strategies, consistent NAV growth, and disciplined management. The NAV is the starting point, but the premium is the price of admission to outperformance. Pay it—and reap the rewards.