A New Look at Discount Returns: Implications for the Global Investor

Volume 14, Number 4, 2016
Anthony Tessitore and Nilufer Usmen

This paper examines risk–return characteristics of discount returns on portfolios of closed end funds and how they might benefit investors. Discount return is defined as the percentage change in discounts over a period. This paper focuses on the distribution of discount returns conditioned on discount level rather than time. Discount returns characterized this way represent an income stream that has little correlation with other well-known asset class and style-based factors. This paper shows that by adding discount portfolios to a traditional asset allocation mix an investor can improve diversification and earn higher risk-adjusted returns.