Few Bargains in Closed-End Funds

The month of January is known for a lot of things: New Year's resolutions, bad movies, sales on winter clothing. It's also the time of year when bargains on closed-end mutual funds become harder to find.

That was particularly true this year. Shares of closed-end funds tracked by Lipper finished the month at a median discount of 2.73% to net asset value. That represented a narrowing of 0.90 percentage points from the end of December and was the lowest level since February 2004.

Unlike open-end mutual funds, which continuously issue and redeem shares at their net asset value, closed-end funds issue a fixed number of shares that are traded throughout the day like stocks. When a closed-end fund's investment style falls out of favor, its share price can fall below the value of its holdings. Conversely, share prices of funds in a "hot" sector are often bid up to a premium over net asset value.

Discounts on closed-end funds of all stripes tend to widen in December as investors sell losers to harvest tax losses, only to narrow again in January. But the tax-loss selling was less pronounced this past December because so many funds were in the black. That meant there was little interruption in the narrowing trend that has been in place for the nearly the past three years.

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