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.
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
Closed-End Funds are Better
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.
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%
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.