Closed-End Funds

   The Closed-End Fund (CEF) is an ancestor to ETF's. There are important differences between the CEF and ETF and open ended funds. When the CEF is created, the fund company raises a specific amount of money from new investors in an IPO (initial public offering). Then the money is invested in the assets specified in the fund's objective sector: stocks, bonds, MPL's or whatever. No new money is allowed in. The fund does not issue new shares to new investors. They also do not buy back shares of existing investors. If you hold shares in a CEF, then to sell, you must sell them on the secondary market just like a stock. The shares are priced throughout the day, allowing for a liquid market. Now here is the interesting part, the shares may trade at a price that is different from NEV. Remember that NEV (net asset value) is the sum of the value of the assets in the fund divided by the shares outstanding. Usually, a CEF trades at a discount to its NAV. This means that you can own the asset for less than they are worth. It also means that if you bought the IPO you have a loss. DON'T BUY IPO'S. If you buy a CEF at a discount, say 10% to NAV, you probably feel pretty smart. It may not last. Some CEF have traded at a discount for their whole lives. The trick here is to identify an asset class that is currently out of favor but you suspect that it will be in demand in the future. Even buying a CEF at a deep discount and selling at less of a discount will result in a profit. Premiums for CEF's are rare. Usually CEF's are purchased for the income they generate. Some asset classes I like for the CEF structure is Preferred Stocks and Convertible Stocks. These are hybrid shares that are not easily understood by many investors. Letting a professional manage them makes sense. Closed End funds can be selected from lists in Barrons weekly publication or The Wall Street Journal. The premium or discount from NAV is listed as well as the last years performance. Some funds in the asset classes I mentioned had returns of 30% or more last year and still traded at a discount. I would not chase an investment unless the outlook is still superior. My next post is about how I forcast the next market winners.