MUTUAL FUNDS. Choices widen in closed-ends
CLOSED-END funds invest like mutual funds but they have a fixed number of shares that trade like stocks. That's the standard definition of a closed-end fund. It's been around for a long time, since they started trading in Britain in the 1870s and in the United States in the 1920s.Skip to next paragraph
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But the basic definiton may be one of the few things that hasn't changed about closed-end funds. Once there were only a few of these funds whose portfolio managers quietly traded in the stock market. If investors wanted to share in the manager's success, they bought shares in the fund on one of the major stock exchanges. For many years, the number of closed-end funds grew slowly, if at all.
The bull markets in the US and around the world, however, have set the brokerages spinning out new funds at a record clip. Thay have also turned up the volume on an increasingly lively debate over discounts.
There are now more than 100 closed-end funds, a puny number compared to the 2,000 or so open-end funds, where additional shares are created each time new money is invested. But more than 30 new closed-ends were added in the last year or so.
In addition to US equity-oriented funds, there are funds that invest in just one country, like South Korea, Japan, Taiwan, Australia, Mexico, or Italy. There are funds that invest in dividend-producing stocks, funds that invest in capital appreciation stocks, funds that invest in precious metals, and funds that invest in bank stocks.
There are even funds managed by people whose open-end funds have been closed to new investors. John Neff of the Vanguard Group, for example, runs the open-end Windsor Fund, which has been closed, as well as the closed-end Gemini Fund. So if investors want the benefit of Mr. Neff's expertise, they have to buy shares in the Gemini Fund.
In an open-end fund, Neff would have to buy or sell stocks to match an ever-changing amount of assets. With a closed-end, the assets stay the same, except for capital appreciation in the stock portfolio.
When closed-end funds are first offered, they sell at their net asset value. Later on, as the supply of sellers starts to outstrip the number of buyers, closed-ends sell at a discount.
``The supply on a closed-end is infrequent and is in most cases wider in the initial offering,'' says A. Michael Lipper, president of Lipper Analytical Services. ``The brokers that were rushing to go out and create buyers on the initial offering were stimulated by the offering commissions, which were a number of times higher than ordinary brokerage commissions.''
``Demand is slightly higher at the initial issue, then tends to fall off,'' Mr. Lipper explains. ``The original buyers, over time, have a need to sell for personal reasons. So there is a more or less constant stream of sellers and a limited supply of shares. There's no secondary market for closed-ends, so with constant selling and only sporadic buying, discounts develop.''
Those discounts have become a hot topic lately. Fund managers don't like them. They believe their funds should sell at full net asset value (NAV), or even a premium, to reflect good performance. Barry Ziskin, president of the Z-Seven Fund, for example, points out that his was the best performing fund in price appreciation - open- or closed-end - last year. In the last three years, its NAV has more than doubled from $9.20 a share to $19.61. Recently, it was selling for $23.87, a 21.7 percent premium.