Why are closed end funds so bad?

Question

The funds that I own are Aod,ETY,BGY & BTZ.

Answer 1

I don't think they are bad provided they are not purchased as an IPO. That is bad. Invariably they immediately loose about 10% to 20% of their value.

But after they have been on the market for several years and they have developed a track record, some can be very good investment vehicles especially if they are purchased during sever market sell offs as we recently had. During those times they can frequently be purchased at as much as 20% below net assets, which in addition might have fallen another 20%. I do like to shop the sales.

Answer 2

This Motley Fool article discusses the matter, including that Alpine Total Dynamic Dividend Fund (AOD) was a pretty good fund. http://www.fool.com/investing/mutual-funds/2007/01/26/dividend-we-fall.aspx

Here is a quote from another article, which speaks well of ETY, but says, "It also has a major drawback: share prices of closed-end funds can move sharply out of line with the value of their holdings, allowing investors to snap them up at a discount or forcing them to pay a premium." http://biz.yahoo.com/ts/070611/10361626.html?.v=3

By the way, BGY on the NYSE is Blackrock International Growth and Income Trust, part of an enormous Blackrock investment group. British Energy Group also uses that symbol abroad. BTZ is Blackrock Preferred and Equity Trust.

The fun part of following one of these is GUESSING what and how market trends will affect such a diverse and unobvious set of holdings. When do you know what a market change is going to put you over the net asset value (NAV), making the stock at a premium price (which necessarily means it needs to fall to an equilibrium point) or when it is at a discount, so buying shares is essentially, as the good Fools note, paying (in example) 85 cents to buy a dollar. Sounds like the trading equivalent of a dog chasing its tail to me, but then I've made a few bucks a few years back when buying a couple that were at a steep discount, the correction was sweet. I suspect your margin is too tight to do that with these big and popular funds.

Answer 3

One problem with closed-end funds is that they often have high management expense ratios. However, ironically, the commissions to buy these funds often are lower than when buying open-end funds through brokers as you buy closed-end funds as you would stocks, and often can buy or sell as much as you want for $10 or less.

Closed-end funds also often sell at significant discounts to their net asset values. Once in a while, they also sell at premiums. So buyers and sellers of closed-end funds need to be aware of the discount/premium of each fund.

What most distinguishes closed-end funds from open-end funds is that portfolio managers never have to liquidate assets to meet redemptions. If fund shareholders don't like their investment, they can exit the fund only by selling the shares on the open market.

So fund assets don't have to be sold in weak markets. When open-end funds sell assets to meet redemptions in weak markets, this may disadvantage remaining shareholders.

One closed-end that has had a good track record is the Latin American Discovery Fund (LDF), managed by Morgan Stanley.

I also like the prospects for the Malaysia Fund (MAY), also managed by Morgan Stanley. Malaysia has one of the largest current account surpluses as a percentage of GDP in the world.

If you have discipline, it's likely that you can buy both funds at a cheaper price than the current price at some point in the next year. When investors become disheartened in the market in general, and in the prospects for emerging markets, they likely will sell these funds aggressively, driving their price much lower.

In August, LDF closed below $24. Yesterday it closed at $30.91.

Like any mutual fund, actively managed closed-end funds ultimately are only as good as the portfolio managers.

Answer 4

These particular funds might be worth owning at some other time. For right now, however, they suck.

Closed end funds are worse than open ended ones, because there are two ways they can suck: they can sell below or above their actual worth.

I would suggest you sell these. Perhaps you should investigate some better ETF's, such as PID, FEZ, FXI, and EEM.

Answer 5

Closed End funds are not "bad". They are however for the more experienced investor.

Answer 6

Check out ACAS, AINV, or MVC. They're some good ones.