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Given the recent market strength, many of the best large-cap stocks are rallying hard.

But what if I told you that you could buy a lot of the best blue-chip stocks right now at a 10% to 15% discount?

Sounds too good to be true, I know. But let me show you how to get big names like Exxon Mobil (XOM), Philip Morris International (PM), AT&T (T), Procter & Gamble (PG), Qualcomm (QCOM), McDonald's (MCD), Costco Wholesale (COST), JPMorgan Chase (JPM) and Wells Fargo (WFC) today, at large discounts.

You can do this by turning to a hybrid type of fund that often gets overlooked by investors, even though it has a storied history going back a century or more: the closed-end fund. Stock-oriented funds in this class own a lot of shares of companies like those above, and the funds are selling for less than the value of their portfolios.

In short: Buy them, and you buy your favorite stocks at a discount. I'll have a list of some particularly attractive options at the end of the column, but first we'll look at how these funds work.

A closed-end primer

Unlike mutual funds, which get the capital they invest directly from investors, closed-end funds raise investment capital in an initial public offering.

As with mutual funds, you get access to their portfolio holdings by purchasing fund shares, but those shares trade throughout the day like stocks. And unlike mutual funds, when you buy, your money goes to an investor who is selling, rather than to the fund for use in expanding its holdings.

This is also why closed-end funds can provide access to stocks at a discount. Because their shares trade like stocks, closed-end funds get pushed around by market supply and demand. Thus, a fund's shares can move independently of where the shares "should" be trading based on the market value of the fund's stock (or bond) holdings.

So, a closed-end fund might trade at a market cap of $90 million, even though the value of all its stocks adds up to $100 million. Such a fund would be said to be trading at a 10% discount to its "net asset value," or NAV. NAV just means the market value of all its investments.

When you buy this closed-end fund at a 10% discount, you're getting a piece of all the stocks it owns for 10% less than what they are worth in the market. These bargains show up more often than you might think.

But why?

One big reason: The fund may specialize in a sector or asset class that's out of favor. In essence, you're betting that the sector will come back into favor, close the discount and give you a profit.

Here's why that matters right now.

For the past few years, investors have decidedly favored bonds and the "safety" of income over stocks. So income-producing closed-end funds trade close to NAV or even at a premium. Meanwhile, many stock-oriented closed-end funds are now selling at a discount, and current prices could prove to be bargains if stocks come back into favor.

"We think 2013 is the year that will change," says Cecilia Gondor, an analyst with Thomas J. Herzfeld Advisors, which specializes in closed-end funds. 

Indeed, there's evidence that investors are turning back toward stocks. If this keeps up, stock-oriented closed-end funds trading at discounts should pay off as those discounts shrink.

A new fund of closed-end funds

Problem is, it would take you hours to get up to speed on closed-end funds and then monitor them daily to spot the discounts. One way around this is to purchase shares of a new mutual fund that specializes in buying discounted closed-end funds.

It's called Virtus Herzfeld Fund (VHFCX) and it is run by Tom Herzfeld and his team at Thomas J. Herzfeld Advisors. Tom Herzfeld has followed closed-end funds for decades, and he's considered one of the top experts in this space. An offering with a similar strategy, his firm's Flagship Balanced Portfolio for private clients, has produced 7% annualized returns over the past 10 years. The Virtus Herzfeld Fund, which just launched, pays a 6% yield. The fund charges 2.35% in expenses and has a load of 1%, so the fees are a little high. But the 7% return for the private fund was against an expense ratio of around 3%, which is a combination of Herzfeld's fees plus the fees charged by the underlying closed-end funds he invests in.

Herzfeld typically watches for unusual discounts in closed-end funds and then pounces on them, which makes this a kind of value approach to investing. He likes funds that not only trade at a discount, but also at a markdown that's bigger than their historical discount.

For example, his mutual fund owns shares of Alpine Total Dynamic Dividend Fund (AOD), a closed-end stock fund that trades at a 13% discount to its NAV, compared with an average discount of about 1% over the past three years. Alpine recently hit the slopes because it cut its "distribution rate," a kind of payout to investors. But the current discount is likely to narrow and return closer to those historical levels of around 1%, meaning the shares should rise from here.

Another example: Herzfeld's mutual fund owns shares of Delaware Enhanced Global Dividend and Income Fund (DEX), a foreign-stock closed-end fund that trades at a 4.5% discount compared with about a 1% discount over the past three years. Another holding is AllianzGI International & Premium Strategy Fund (NAI), a closed-end foreign-stock fund going for a 4.2% discount compared with an average discount of 1.4%.

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The average discount on closed-end funds in the Virtus Herzfeld Fund has been running just below 10%. Often such gaps close independently of what is going on in the stock market, meaning Herzfeld's funds can go up even in a sideways market. So theoretically, at least, the Herzfeld mutual fund can add diversification to your portfolio, points out Peter Batchelar, of Virtus Investment Partners (VRTS).

Large-cap stocks at large discounts

If you want to buy the closed-end funds themselves to get at some discounted blue-chip stocks, here's a quick guide to help you.