Closed-End Meltdown

Still kicking yourself for missing out on Baidu.com(BIDU), Under Armour(UARM) or one of 2005's other hot IPOs? Don't feel so bad. You could be kicking yourself for getting into one of this year's disappointing closed-end fund new issues.

In the closed-end fund world, 2005 has been a banner year, at least when it comes to initial public offerings. Forty-five closed-end funds have launched so far this year, raising over $20 billion in proceeds for their delighted issuers and yielding hefty fees for their even happier underwriters.

Closed-end fund shares are listed on securities exchanges, are actively managed and trade intraday on the open market. They typically trade in relation to, but independent of, their underlying net asset values, or NAVs. That means that unlike open-end mutual funds, shares of closed-end funds can trade at premiums or discounts to their underlying NAVs, a feature that many investors find attractive.

For investors, however, the quality of these new offerings has failed to live up to the voluminous quantity, especially for those unlucky souls persuaded to purchase the funds at the offering price.

Of the 45 IPOs released since January, only four as of the beginning of this month are trading above their offering price, and 24 are down 10% or more. The biggest losers since their public debuts are the Macquarie Global Infrastructure Total Return Fund(MGU), Eaton Vance Short Duration Diversified Income Fund(EVG) and the First Trust/FIDAC Mortgage Income Fund(FMY), which are all down close to 20%.

Perhaps even more distressing than the amount of the decline from the IPO price is the rate at which some of these funds fell off the table.

The Eaton Vance Tax Managed Global Buy-Write Fund(ETW) and the Enhanced S&P 500 Covered Call Fund(BEO), for example, are both off 10.5% since their shares were listed on the NYSE in September. Meanwhile, the Calamos Global Total Return Fund(CGO) has dropped 11% after going public in late October.

"Over the last few years, the party of closed-end fund initial public offerings has probably invited a few investors who should never have been invited in the first place," says Mariana Bush, closed-end fund specialist for Wachovia Securities. "These investors, whose risk tolerance may have been blurred by attractive yields, probably did not realize that they needed a stronger stomach to tolerate the occasional price volatility of the closed-end structure."