Closed-End Funds Feel Twice the Pain

That represented a big reversal, given how high international stocks, and Chinese stocks in particular, had been riding. In the three months ended Jan. 31, five of the funds on our list traded at premiums to their NAV, on average. Interestingly, however, the valuations of these five funds already had swung to a discount to NAV by Feb. 23 -- a possible signal that investors were starting to get nervous about their lofty valuations even before the Shanghai stock market stumbled last week.

While only the (CHN Quote)China Fund (CHN) started last week with a discount to NAV of more than 10%, nine of the funds on the list had discounts in the double digits at the end of the week's carnage.

In fact, the only fund on the list that started last week trading at a premium to its NAV was the (IRL Quote)New Ireland Fund (IRL), which was worth 4.16% more than the value of its holdings at the start of trading on Feb. 28. By the closing bell on March 2, it had swung to a discount to NAV of 3.28%, a trend its shareholders dearly hope will be reversed by St. Patrick's Day.

As Brett Arends noted last week in his column "Closed-End Funds Offer the Best Bargains," funds that get hit by a combination of falling asset values and widening discounts to NAV when the markets sell off also have the potential for an accelerated recovery when markets rebound. That's because investors can benefit from both an increase in net asset value and a narrowing of discounts to NAV.

While this may sound tempting, investors should beware that share prices of closed-end funds can persist at levels below their NAVs for maddeningly long stretches of time. Of the 521 closed-end funds we tracked at the end of January, 383 of them, or 74%, traded at average prices that were below their respective NAVs over that period. So even though these funds appear to be bargains, it may be years before this strategy pays off.