Bargains Rare in Closed-End Funds

The bargains in closed-end funds keep getting harder to find.

Continuing a recent trend, the median discount on closed-end fund share prices to their net asset values shrank by 29 basis points in April to 2.04% -- the narrowest level since March 2004, according to Lipper.

Unlike open-end funds, which issue and redeem shares upon request at their net asset value, closed-end funds issue a finite number of shares that trade on an exchange like stocks. That means share prices get bid up above net asset values when an investment style is in vogue, forcing investors to pay a premium. Conversely, when the market sours on a fund, its share price can fall below net asset value, allowing investors to pick it up at discount. But thanks to investors' appetite for yield, there are currently fewer bargains than there have been for over two years.

The good news for bargain hunters is that, with more funds now selling at or near a premium to net asset value, they're unlikely to get much more overpriced, according to Tom Roseen, senior research analyst at Lipper. He expects the median discount has probably stabilized and could even start to widen in the coming months.

This reversal has already shown up in domestic equity funds, where the median discount widened by 62 basis points during the month of April to 3.01% from 2.39%. Domestic equity funds were the only category of closed-end funds tracked by Lipper where discounts widened.