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Closed-end Funds

Closed-end funds can pay-off, too

Under the "investment company" umbrella fall a variety of products like open-end funds ---those are the ones most of us invest in--- unit investment trusts, (UITs), exchange traded funds, (ETFs), and closed-end funds. The latter, closed-end funds, have been around for decades but are often overlooked by investors because many people really don't understand what they are.

While closed-end funds don't get the advertising hype that open-end funds do, they ought not be overlooked. With over $123 billion in assets, there are more than 600 closed-end funds to choose from, according to the Closed-End Fund Association. Although the types of closed-end funds around include everything from specialty equity to fixed-income funds, you'll find more closed-end fund portfolios made up of municipal bonds than anything else. After the tax-free's, next in number are growth portfolios, growth and income ones, and then global portfolios.

Thomas J. Herzfeld is a guru within the closed-end fund world and president of a Miami-based advisory firm bearing his name. He says one of the reasons closed-end funds haven't been as popular as open-end ones is because their make-up is misunderstood.

"Most people do not understand that the (per share) price of a closed-end fund is determined by supply and demand in the open market just as any ordinary stock is, " explains Herzfeld. " Another misunderstanding is in the way they are capitalized. They generally have one fixed offering and then don't usually issue any additional stock. Most people think that they continually issue stocks like open-end funds do. But they don't."

As a result, shares of closed-end fund shares ----which trade on the major exchanges--- can be bought and sold at any time throughout the day. Open-end fund shares, on the other hand, don't trade all day long and their per share price---usually tallied at the close of the each business day--- is determined not by supply and demand but by the fund's net asset value (NAV). (An open-end fund's net asset value is determined by the value of the investments in its portfolio, less liabilities, divided by the number of shares outstanding.)

Additionally, while both open- and closed-end funds tally up their assets daily to determine the fund's Net Asset Value,(NAV), a closed-end fund's per share price may trade above or below its NAV. Those trading below are said to be trading at a "discount" to their NAV; those trading above, at a "premium" to it.

Here's more from Herzfeld about closed-end funds:

Q: Do you think that there's more interest in closed-end funds today than there was say two or three years ago?

Herzfeld: I wouldn't say the interest level has changed. It has never been an area that's been embraced by the general public. And some of the reasons for that are because the funds themselves don't do any advertising, because there is no budget for them to advertise; brokers tend to only recommend new issues; and then, once they start trading in the after-market, it's an area of investments that rarely has any sponsorship and so the public tends to overlook it.

Q: Municipal bond closed-end funds are very popular. Why is that?

Herzfeld: The leveraged structure of closed-end funds make it possible for closed-end municipal bond funds to provide investors with better yields and better total returns than they could find when buying municipal bonds directly or from open-end mutual funds that are not leveraged.

Q: What other kinds of closed-end funds have been hot this year?

Herzfeld. This year, the best price of net asset value performance has been in the foreign funds. They were out of favor for a lot of years. Some of the ones we like are the Mexico Fund, its NAV is up approximately 12 percent and the share price has gained 20 percent, through April 16; even our own Herzfeld Caribbean Basin Fund has a NAV that's up a little over 14 percent, its share price is up about 17 percent and it's trading at a discount to NAV; and, the Korea Fund's NAV is up about 33 percent, its share price has gained about 36 percent and it's trading at a 13 percent discount.

Q: I know it's wise to only look at closed-end funds trading at discounts to their NAVs and in the foreign funds you've mentioned that's been the case. But do you think this foreign fund trend will continue?

Herzfeld:I think this is going to be a good year for foreign country funds. To us, the most interesting region is China, and if I were going to buy a China fund, I'd buy Templeton China World. It's trading at a discount to its NAV, the NAV is up 16 percent and share price up about 21 percent.

To learn more about closed-end funds, visit the Closed-End Fund Association's web site at www.CEFA. com. Or, Thomas Herzfeld's site at www.herzfeld.com


Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.

To read more articles, please visit the column archive.

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