How To Find Bargains In Closed-End Funds

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How To Find Bargains In Closed-End Funds
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Some of the 482 funds in the Forbes Closed-End Fund Ratings are great buys. Most are dreadful places to put money. Here's how to distinguish the good from the bad:

are great buys. Most are dreadful places to put money. This article explains how to distinguish the good from the bad.

The closed-end format, which commands $220 billion of customer money, is a somewhat unusual beast in the wilds of Wall Street. Although this species of investment company is the most ancient, it has been eclipsed in market share by the open-end fund and, more recently, the exchange-traded fund. Mutual funds and ETFs allow capital to flow in and out. Closed-ends don’t. Their capital is frozen in place.

That discount is one of the elements of a cost analysis. A discount interacts with a cash payout from the fund to deliver an instant profit into your hands. What about a discounted fund that pays out nothing? That looks like a bargain, too, but it isn’t one. If you think a discount, all by itself, is a bonanza, you’re making a false analogy with other things for sale. A 17% discount on a sweater you were going to buy for $100 saves you $17. It doesn’t do you any good, though, to buy $100 worth of a portfolio for $83 if the discount is the same when you sell.

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