Investment Opportunities

Closed End Funds… The Only Funds That Go “On Sale”

Closed End Funds… The Only Funds That Go “On Sale”

by Alexander Green, Chairman, Investment U
Monday, July 16, 2007: Issue #693

Americans are comfortable with mutual funds. According to Investor’s Business Daily, we have over $11 trillion invested in them.

But there is another type of fund, one that holds much less in total assets, that is generally a better bargain. They’re called closed end funds. And if you aren’t familiar with them, you should be.

Open-end funds, like those offered by Fidelity, Vanguard and other leading mutual fund groups, continuously offer and redeem shares based on each day’s closing net asset value.

Closed-end funds are different. They raise money on an initial public offering, just like a company going public, and then begin trading on an exchange

Buying Closed End Funds Through Your Broker

Because these funds trade like stocks, you buy them through a brokerage account. And you can trade them intra-day using market orders, limit orders, or stop orders. They are marginable like stocks, too.

A closed-end fund’s market price at any given time may be higher or lower than its net asset value. If it is trading above the net asset value, it is said to be trading at a premium. If it is trading below the net asset value, it is trading at a discount.

633 Closed End Funds Totaling $298 Billion

There are few buy or sell signals that are more obvious than buying these funds at a discount and selling them when they go to a premium. If you do this successfully, you’ll not only benefit from the fund’s rising net asset value, but also the shrinking discount.

In essence, you have two ways to profit instead of one. Perhaps that’s why closed-end funds are growing in popularity.

In the first half of this year alone, more than $50 billion in new closed-end funds have been issued. That’s more than in all of 2006.

And the universe of closed-end funds is growing, as well. In 2002, for example, there were only 562 closed-end funds in the U.S., holding $156.4 billion in assets.

By the end of last year, total closed-end assets had grown to $298 billion spread among 633 funds.

Of course, assets in closed-end fund still trail another type of publicly-traded fund – ETFs or exchange-traded funds. Unlike closed-end funds, ETFs are unmanaged and have an arbitrage mechanism that keeps them from trading at a significant discount to net asset value.

And, unfortunately, closed-end fund discounts are shrinking too. According to Tom Rosen, senior analyst at Lipper, the average closed-end fund discount in 2005 was 5.5%. Today it’s just 1.7%.

But there are still some bargains out there, especially for investors seeking high monthly income.

A High-Yield Fund “On Sale” Right Now

Take the Western Asset Global High Income Fund (NYSE: EHI), for example.

This is an extremely flexible fund that can invest in high-yield or high-grade bonds, governments or corporates, in any market, anywhere in the world. As market conditions change, the fund can adjust its strategy to take advantage of fluctuations.

As of the end of March, the fund had 26% of its assets in high-yield corporate bonds, 20% in emerging market bonds, 28% in mortgage bonds, and the balance in cash and other short-term securities.

The fund currently yields 7.7% and trades at an 8% discount to net asset value. If the fund maintains its dividend and trades up to its net asset value over the next 12 months, you could easily earn a 16% total return.

That’s a return that few, if any, fixed-income mutual funds will be able to match.

Good Investing,


Today’s Investment U Crib Sheet

  • Right now, investors are piling into another closed-end fund, the Cornerstone Total Return Fund (AMEX: CRF). And they’re certainly paying for it…At $18.75, shares are trading at a 92% premium to Net Asset Value ($9.75). Income-seeking investors, it seems, are willing to pay nearly two times what the fund is worth in exchange for its attractive yield, currently 11.4%.
  • To find more closed-end funds, visit ETF Connect. You can sort them by asset class, region and by whether they’re trading at a discount or a premium to NAV.


An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.

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