Closed-End Bargains Hard to Find

Bargains in closed-end funds continue to erode like a snowman in a spring rainstorm.

In March, shares of closed-end funds covered by Lipper traded at a median discount of 2.34% to net asset value, the lowest level in 12 months. That level marked a 0.86 percentage-point decline from the end of February.

During the one-year period ended March 31, the combined discount on closed-end funds declined by 4.29 percentage points.

Whereas open-end mutual funds continually issue and redeem shares at their net asset value, closed-end funds release a fixed number of shares and are traded like stocks. Therefore, the market, not its holdings, sets the price of shares in the funds.

Prices in a trendy sector often sell at a premium over net asset value. Likewise, when investors sour on a fund's investment style, the share price can fall beneath the value of its holdings.

The past 12 months have seen a steady decline, mainly due to investors looking for yields from securities. Investors paying $8 a share for a fund trading at a 20% discount are purchasing $10 worth of equity or bond holdings, leading to a higher yield.

When discounts narrow, people are less interested in buying into tight discount areas.

"People are looking for that yield, that kicker to get the benefits," says Tom Roseen, a senior research analyst at Lipper. "Investors have really changed their mindset from late 1999 and 2000, when it was 'Income? Who cares? Capital gain, capital appreciation.' And we learned a good lesson in the [subsequent market] decline that we need both sides of the equation, both capital appreciation and income distribution."