Alpha Buying: Follow Saba Capital Into 3 Discounted Income Funds

I enjoy watching a big fund manager explain why shareholders should keep waiting for their money.

The fund owns the assets. Everyone can see the value. The shares still sell for far less than those assets are worth, and the answer always seems to involve giving the manager more time.

You can imagine how well that goes over with me.

If we own a dollar’s worth of investments and the market offers 86 cents for our shares, I want someone asking what we can do about it.

Boaz Weinstein has been asking that question rather loudly.

And some very large firms have had to give shareholders a way out.

His firm, Saba Capital, has recently added to three closed-end funds:

• Mexico Fund (MXF)
• Ellsworth Growth and Income (ECF)
• Japan Smaller Capitalization Fund (JOF)

Each trades below the net value of its holdings.

Each pays cash to shareholders.

And each has attracted the attention of an activist investor with a history of pushing fund managers to do something about persistent discounts.

This is the sort of buying I like to follow here at Alpha Buying.

We can see the assets. We can see the price being paid. We can see a large shareholder with real money at stake and a history of pushing for change.

That beats hoping the next buyer pays more because the stock has a fashionable name.

Boaz Weinstein: The Activist Who Wants Shareholders to Get Their Money

Weinstein learned his trade at Deutsche Bank, where he built a group hunting for gaps between the prices of stocks, bonds, and credit contracts.

He became a managing director at just 27.

He started Saba on its own in 2009, and the firm now reports approximately $6.8 billion in assets.

His most famous payday came during the London Whale mess in 2012.

Enormous trades at JPMorgan pushed prices out of line in one corner of the credit market.

Weinstein saw the opening and took the other side.

JPMorgan lost $6.2 billion.

Saba made several hundred million dollars.

More recently, a report put Saba’s UK-focused closed-end fund strategy up about 42% after fees through September 2026.

That figure came from people familiar with the fund, and it applies only to that particular strategy. It should not be confused with the performance of Saba’s credit funds or other investment strategies.

Still, Weinstein has demonstrated an ability to recognize situations where the market price and underlying value of an investment have become disconnected.

And that brings us to one of my favorite corners of the market.

Closed-end funds trading at substantial discounts to the value of the assets they own.

Buying a Dollar’s Worth of Assets for 86 Cents

A closed-end fund holds a portfolio of investments, but its shares trade on an exchange.

Unlike a traditional open-end mutual fund, the market price of a closed-end fund does not have to equal the value of its underlying portfolio.

That underlying value is called net asset value, or NAV.

The share price can sink well below it.

Suppose we buy a fund with $10 of NAV for $8.60.

That is a 14% discount.

If we eventually collect the full $10, we make approximately 16.3% before costs and any cash paid along the way, assuming the underlying NAV has not changed.

The portfolio could go nowhere, and closing the discount would still put money in our pockets.

That is an attractive proposition.

The catch is getting our hands on that $10.

A discount can last for years, and the holdings can lose value while we wait.

Think of the old Orioles teams that sat in last place while everyone agreed the talent was in the clubhouse.

Having the assets was never the problem.

Getting them to perform was.

That is where Weinstein earns his seat at the table.

Saba can build a large position and press for share buybacks, asset sales, a new manager, or a tender offer.

A tender offer allows shareholders to sell some of their shares back to the fund, often at a price close to NAV.

Managers resist, of course.

Returning money means fewer assets on which to charge fees.

Shareholders should ask whether leaving that money in place serves their interests.

I like having someone at the table who will ask that question with persistence.

And Saba has gotten results.

In 2025, BlackRock agreed to tender offers covering 50% of one fund’s shares and 40% of another’s at 99.5% of NAV.

Templeton Global Income completed a tender for 45% of its shares at 99% of NAV in 2023, and Saba later took over as manager.

Those are real examples of activism turning a persistent discount into an opportunity for shareholders to recover more of the underlying value.

Now let’s look at the three funds Saba has been buying.

Mexico Fund (MXF): Mexican Assets at 86 Cents on the Dollar

The Mexico Fund offers a portfolio of established Mexican businesses at a substantial discount.

MXF currently trades at a 14.18% discount to NAV.

In other words, we are paying approximately 86 cents for each dollar of net assets.

The fund also pays shareholders 35 cents per share each quarter.

Maintain that payment for a full year, and shareholders receive $1.40 per share in cash distributions.

At the quoted share price, that represents an annualized 6.82% cash distribution rate.

We are getting a portfolio of Mexican businesses at a discount while collecting cash along the way.

The portfolio itself is concentrated in several of Mexico’s major companies.

At the end of September, the largest holdings included:

• Grupo México: 16.9% of assets
• Banorte: 10.85%
• FEMSA: 10.05%

Cemex and Walmart de México are also among the larger positions.

The top ten holdings account for approximately 68% of net assets.

That gives us exposure to mining, banking, consumer spending, and construction.

It also means a substantial portion of the fund’s performance depends on a relatively small group of companies.

The Mexican peso matters, too.

A business can perform well in its home market and still be worth less to American investors if the peso weakens against the dollar.

Those are risks we need to understand before buying.

A Tender Offer Could Help Close the Discount

What makes MXF particularly interesting is that the board has already approved a conditional tender offer.

Under the arrangement, the fund could tender for 20% of its outstanding shares at 98% of NAV, less costs.

The measurement period ends June 30, 2029.

The tender is triggered if either of two conditions is met:

• The fund underperforms its benchmark over the measurement period.
• Its average discount to NAV is at least 10% during the final 12 months.

That gives shareholders specific conditions to monitor rather than relying entirely on management’s promises.

I would prefer an earlier date.

Waiting until 2029 is not my idea of immediate gratification.

Still, we have clearly defined terms, a meaningful discount, and cash distributions while we wait.

The tender is conditional, not guaranteed. Even if it occurs, shareholders may not be able to sell every share they own.

But it provides a potential route toward recovering more of the value already sitting inside the portfolio.

That makes MXF worth investigating.

Ellsworth Growth and Income (ECF): Convertibles, Income, and an 11% Discount

Ellsworth Growth and Income is managed by Gabelli.

The fund primarily owns convertible securities and common stocks, seeking income and capital appreciation in roughly equal measure.

Convertible securities are an interesting corner of the market.

A convertible is usually a bond or preferred share that can be exchanged for common stock.

We collect income while retaining the ability to participate in a stock’s gains.

That combination can be attractive when securities are purchased at reasonable prices.

And with ECF, we can buy the portfolio itself at a discount.

The fund currently trades at an 11.38% discount to NAV.

That works out to approximately 89 cents for each dollar of net assets.

The quarterly distribution increased 16% in August, to 22 cents per share.

At that rate, shareholders receive 88 cents annually, representing a 7.69% cash distribution rate at the quoted price.

That is enough to catch my attention.

But we need to understand where those payments come from.

The Source of the Distribution Matters

ECF estimated that approximately 95% of its fiscal 2026 distributions would come from net capital gains on a book basis, with roughly 5% coming from net investment income.

The final tax characterization may differ.

That distinction is important.

We are not simply collecting interest and dividends generated by the underlying securities.

A substantial portion of the cash distributions depends on investment gains.

That means the value of the remaining portfolio matters just as much as the checks shareholders receive.

A large distribution does us little good if the underlying NAV steadily declines.

ECF also uses borrowed money and preferred capital equal to approximately 14.7% of its investment exposure.

Leverage can help when investments perform well.

It can also magnify losses when markets move against the portfolio.

These are not reasons to dismiss the fund.

They are reasons to understand what we own.

The discount gives us an additional source of potential return if it narrows.

Saba’s involvement introduces the possibility of pressure for shareholder-friendly changes.

But we should not count on a tender offer or management change until one is actually announced.

For now, ECF offers an interesting combination of convertible securities, common stocks, cash distributions, and a meaningful discount to NAV.

That is enough to put it on the research list.

Japan Smaller Capitalization Fund (JOF): Japanese Small Caps at a 14% Discount

Japan Smaller Capitalization Fund may be the one that best fits my taste for smaller companies trading at attractive prices overseas.

Nomura manages the fund, which normally invests at least 80% of its assets in smaller Japanese companies.

At the end of September, it held 88 positions.

Some of the larger holdings included:

• Daishi Hokuetsu Financial Group
• Sakata Inx
• Tomen Devices
• Citizen Watch
• Yondenko

Most of us are not going to spend our evenings studying those companies one at a time.

A fund provides a convenient way to own a diversified collection of smaller Japanese businesses.

There is also a broader investment case.

Japanese companies have been facing increasing pressure to improve capital allocation and their treatment of shareholders.

The fund’s manager sees opportunity as businesses make better use of their capital.

If that happens, we could benefit from two developments.

First, the underlying Japanese stocks could become more valuable.

Second, the discount between JOF’s share price and its NAV could narrow.

Of course, the yen will affect our dollar-denominated returns, just as the peso does with MXF.

A 9.62% Cash Distribution Rate

JOF currently trades at a 14.12% discount to NAV.

That means we are paying approximately 86 cents for each dollar of net assets.

The fund pays a monthly distribution of 9.56 cents per share.

Over 12 months, that amounts to $1.1472 per share.

At the quoted share price, the annualized cash distribution rate is 9.62%, the highest of the three funds we are examining.

The board has declared that monthly payment for October, November, and December under its level distribution plan.

A monthly check is pleasant.

But we need to understand what it represents.

This is a managed distribution policy.

We should not assume the Japanese stocks inside the portfolio generate dividend yields anywhere near 10%.

The source of the cash and the direction of NAV tell us much more about the health of the investment.

If a fund pays out substantial amounts while the value of its remaining assets declines, that is not the kind of income opportunity we want.

The discount is appealing, but we still have to pay attention to what happens inside the portfolio.

JOF Has Already Returned Capital Through a Tender

JOF has something else going for it.

The fund has already demonstrated a willingness to return capital to shareholders.

In July, it completed a tender offer for up to 10% of its outstanding shares at 98% of NAV.

Shareholders whose shares were accepted received $12.7792 per share.

That tender offer has ended.

We cannot assume another one is coming.

But it demonstrates what can happen when a closed-end fund trades at a substantial discount and shareholders press for action.

It also shows why tender terms matter.

If a fund offers to repurchase 10% of its shares, investors may have only a portion of their tendered shares accepted.

We need to understand the mechanics rather than assuming we can sell our entire position near NAV.

Still, JOF combines several things I like:

Smaller companies in an overseas market, a substantial discount to underlying assets, a managed cash distribution, and a demonstrated willingness to conduct a tender offer.

Add Saba’s involvement, and we have a situation worth following closely.

Buying the Discount, Not Just the Distribution

There is a common thread running through all three funds.

We are not buying them simply because they pay cash.

We are looking at portfolios whose shares trade below the value of their underlying assets.

The distributions give us cash while we wait.

And Saba’s involvement introduces a shareholder with both the resources and the experience to push for changes that could help narrow those discounts.

Here is how the three opportunities compare:

Fund	NAV Discount	Annualized Cash Distribution Rate
Mexico Fund (MXF)	14.18%	6.82%
Ellsworth Growth and Income (ECF)	11.38%	7.69%
Japan Smaller Capitalization Fund (JOF)	14.12%	9.62%

These are cash distribution rates at the quoted prices, not guaranteed investment returns.

Each fund also carries different risks.

MXF depends heavily on Mexican businesses and the peso.

ECF owns convertible securities and stocks, uses leverage, and relies substantially on investment gains to support its distributions.

JOF offers exposure to smaller Japanese companies, along with currency risk and the uncertainties of a managed distribution policy.

And in every case, the discount could remain wide or become even wider.

A large shareholder buying is useful information.

An activist willing to push for change improves the odds that something might happen.

But it does not eliminate investment risk or guarantee a tender offer.

We still have to study the assets, the costs, the distribution policies, and the terms of any shareholder action.

That is the work that separates an attractive discount from a value trap.

Following the Money Without Paying Hedge Fund Fees

What I like about this week’s buying is that we can follow along without writing a check to a hedge fund.

These are listed closed-end funds that we can own through a regular brokerage account.

MXF gives us Mexican businesses.

ECF gives us convertible securities and common stocks.

JOF gives us smaller Japanese companies.

Each comes with a substantial discount to NAV, a cash distribution, and a large shareholder with a history of pressing managers for change.

That is plenty to get me interested.

We can spend our time studying assets priced at roughly 86 to 89 cents on the dollar while Weinstein works on getting more of that dollar into shareholders’ hands.

There is no guarantee he succeeds.

There is no guarantee the underlying portfolios appreciate.

And there is certainly no guarantee the market will close these discounts on our preferred timetable.

But at least we know what we are buying, what the assets are worth today, and what might help unlock that value.

I will take that over chasing whatever Wall Street has decided to get excited about this afternoon.