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Closed-End Funds
Outperform
As of November 15,
2011, the overall market, at least as measured
by the S&P 500, was even for the year. However, more than 75% of the 617
closed-end funds tracked by Morningstar were in positive territory for the
year, and more than 40% of them had rewarded shareholders with 15% or
higher returns.
By contrast, only 41% of the 6,657
conventional mutual funds tracked by Morningstar had recorded year-to-date
gains and less than 1% of them had racked up 15%
or higher returns.
Admittedly, a much higher percentage of
closed-end funds invest in fixed-income securities, especially municipal
bonds, which have outperformed the overall market. Nevertheless, the
closed-end fund’s outperformance is striking.
About Closed-End Funds
Closed-end funds are similar to conventional managed mutual funds, but
with one important difference. Unlike conventional funds that sell and
redeem shares as needed, closed-end funds sell a fixed number of shares
when first offered to the public. After that, the fund trades like a
stock. Buyers purchase from existing shareholders, and shareholders must
find a buyer when they sell. Here’s why that’s important.
Most investors typically add to their
mutual fund holdings after the market has already moved up. Because
mutual fund managers must deploy the new money, they are forced to buy
stocks that have already scored big gains.
Conversely, many investors dump their fund
shares after the market has suffered a big drop. Thus, fund managers must
raise cash to redeem fund shares by selling stocks that are likely trading
near their lows. As a result, mutual fund investors force fund managers to
buy high and sell low.
But closed-end fund managers don’t face that
problem. Since they have a fixed amount of money to invest, they don’t
have to worry about raising cash to redeem shares, or finding places to
invest new cash in a frothy market.
Before you consider closed-end funds, you
need to know about the difference between share price and net asset value.
A fund’s net asset value (NAV) is the
per-share value of its total assets. For instance, if a fund had $5,000 of
assets and 100 shares out, its NAV would be $50 per share. Because they
create or retire shares as needed, conventional mutual funds always trade
at their NAVs.
Closed-end fund share prices, however,
reflect the balance of supply and demand for their shares. They rarely
trade at their NAVs. Most funds trade at discounts, typically five to 10%
below their NAVs. Some, however, trade at premiums, especially if they are
in a hot sector or have a popular manger.
ETF Connect (www.etfconnect.com)
and Morningstar (www.morningstar.com)
are good resources for researching closed-end funds. ETF Connect also
offers a screener useful for finding closed-end fund candidates. Also, the
Closed-End Fund Association site (www.closed-endfunds.com)
is a good resource for learning more about closed-end funds.
When tracking fund performance, focus on
changes in the underlying net asset value rather than share price
performance.
Best: Year-to Date
Here are the best performing closed-end funds, based on NAV, year-to-date.
* BlackRock Build
America Bond Trust (ticker BBN). Year-to-date return 33%. Recently traded
at a 7% discount to its NAV. Invests in taxable
municipal securities known as Build America Bonds. Pays dividends equating
to a 7.6% yield (12-month income divided by
share price).
* Nuveen Build
America Bond Opportunity (NBD). YTD return 25%. Recently traded at a
6% discount. Pays dividends equating to a 7.6%
yield.
* Central Gold
Trust (GTU). YTD return 24%. Recently traded at a 2%
premium. Seeks to replicate the price of gold bullion. Pays no dividends.
* Guggenheim Build
America Managed Duration (GBAB). YTD return 23%. Recently traded at a
6% discount. Pays dividends equating to a 7.5%
yield.
* Sprott Physical
Gold Trust (PHYS) YTD return 23%. Recently traded at a
3% premium. Seeks to replicate the price of gold bullion. Pays no
dividends.
Best: Last Three Months
Here are the top five performing closed-end funds, based on NAV, over the
past three months.
* Guggenheim
Enhanced Equity Strategy (GGE). Three-month NAV return 10%. Recently
traded at a 16% discount to its NAV. Holds dividend paying or other income
producing securities. Pays an 8.2% dividend yield.
* Guggenheim
Enhanced Equity Income (GPM). Three-month return 9%.
Recently traded at a 6% discount to its NAV.
Holds high-yield dividend paying or other income producing securities.
Pays an 11.3% dividend yield.
* John Hancock
Tax-Advantaged Dividend Income (HTD). Three-month return
9%. Recently traded at a 7%
discount. Holds dividend paying common and preferred stocks. Pays a 7.0%
dividend yield.
* Source Capital (SOR).
Three-month return 9%. Recently traded at a 14%
discount. Holds common stock and preferred stocks, fixed income and
convertible securities. Pays a 6.4% dividend yield.
* Kayne Anderson
Midstream Energy (KMF). Three-month return 8%.
Recently traded at a 13% discount. Holds mainly petroleum and natural gas
pipeline stocks. Pays a 7.5% yield.
As you’ve already heard, past performance
doesn’t predict the future. Consider these closed-end funds to be research
candidates, not a buy list.
published 11/20/10 |
