Harry Domash's Winning Investing

Open Up to Closed-End Funds

If youíre a regular reader, you probably already know that when it comes to mutual funds, I favor buying closed-end funds instead of the more familiar conventional mutual (open end) funds.

Whatís the difference?

When you buy an open end fund, the fund creates new shares and invests the cash that you paid for the shares. Conversely, when you sell, the fund may need to sell holdings to generate the cash needed to redeem your shares.

Buy High -- Sell Low?

Research tells us that most investors add to mutual fund holdings in up markets and sell shares in down markets. Consequently, open end fund managers must deploy new cash in hot markets and sell holdings in falling markets. Thus, open end fund managers are forced to buy high and sell low.

Why Closed-End Funds are Better

By contrast, closed-end funds only sell shares during their initial offering. After that, new buyers must purchase from existing shareholders, and shareholders must find a buyer if they want to sell. Thus, closed-end fund managers donít have to worry about investing new cash when prices are high, or raising cash to redeem shares in weak markets.

Another Advantage

Also, astute investors can often take advantage of another factor unique to closed-end funds. Because they trade like stocks, share prices rarely trade at the per-share value of their holdings (net asset value). Instead, fund prices reflect the balance of supply and demand, sometimes trading above (premium) their net asset value and sometimes below (discount). Typically, more funds trade at discounts than at premiums, and many are currently trading at 5% to 15% discounts to net asset values. Putting that another way, you could get $100 worth of assets for $90 by snagging a fund trading at a 10% discount. Further, you could score extra capital gains should the fund trade back up to its net asset value.

Here are four closed-end funds trading at 6% to 15% discounts, and paying regular dividends.

Four Funds Worth Checking

Cohen & Steers Quality REIT and Preferred Income (RNP): Holds U.S. real estate investment trusts (REITs) and preferred stocks. The fund returned 7.3% over the past 12-months, and 12.7%, on average, annually over the past five years. Itís currently trading at a 15% discount and pays a 7.9% dividend yield.

Eagle Capital Growth (GRF): Holds a concentrated portfolio of only 21 U.S. stocks, about half financial services. The fund returned 3.6% over the past 12-months, and 11.7%, on average, annually over the past five years. Itís currently trading at an 11% discount and pays a 6.3% dividend yield.

John Hancock Tax-Advantaged Dividend Income (HTD): Holds a mix of U.S. dividend paying common and preferred stocks. Returned 16.2% over the past 12-months, and 15.5%, on average, annually over the past five years. Itís trading at a 6% discount and pays a 6.2% yield. 

Reaves Utility Income (UTG): Holds mostly U.S. utility and telecommunications stocks. Returned 7.5% over 12-months, and 14.6%, on average, annually over five years. Trading at a 7% discount and pays a 6.2% yield.

Consider these funds to be investment candidates, not a buy list. Do your own due diligence. The more you know about your investments, the better your results.

Published 4/25/16

Questions or comments about this site: click here

Winning Investing  ē  199 Quail Run Road ē Aptos, CA 95003

(Aptos is 'the beach' for Silicon Valley)

(800) 276-7721 ē (831) 685-1932