Bargains Rare in Closed-End Funds

Discounts typically dry up at the end of the year as investors hold off selling shares to avoid incurring capital gains tax. They tend to widen again once the new year begins and investor resume selling. But the narrowing trend of late last year has continued through the first four months of 2007, thanks to investors' appetite for yield.

After all, closed-end funds are sold on yield, Roseen says. If a fund with $10 of assets per share is trading a discount of 10%, you're getting a higher yield than if you paid the NAV.

Roseen says the current mania for yield has been driven by small investors reentering the market. It represents a marked shift from in buying preferences. "It used to be, prior to 2000, everybody wanted capital appreciation," he says. "That was the name of the game. Who cared about income?"

By comparison, today's closed-end investors seek both capital appreciation and income. "We've seen that in the types of funds that have been coming out in the closed-end world," Roseen says. "They're all either international or income-oriented."

Despite a raft of new issuance that has contributed to the total supply, discounts on international and income-oriented funds have dried up, and a high number of them are selling for a premium over the value of their holdings.