Bargains Pile Up in Closed-End Funds

Bargains in closed-end funds kept piling up in October as they traded at discounts to net asset values not seen in nearly seven years.

The median discount on closed-end funds tracked by Lipper widened by 169 basis points to 8.73% at the end of the month from 7.04% in September. That discount was the largest since December 2000.

"Market volatility is up and people are concerned about where the economy is going," says Tom Roseen, a senior research analyst at Lipper.

These funds are still traded primarily by savvy individual investors, Roseen says, and "they're becoming a little more hesitant and not quite as enthusiastic as we saw, say, in May," when the median discount had narrowed to 1.81%.

Unlike open-end funds, which are continuously offered, closed-end funds issue a fixed number of shares that are bought and sold on an exchange like stocks. They often trade below the value of their holdings.

By Oct. 31, only 61 funds in the closed-end universe were trading at a premium, down from a one-year peak of 240 on May 31.

Just 18% of all closed-end funds' discounts narrowed or premiums widened in October.

The big discounts on equity funds belied their strong performance. Even though investors weathered two days where the Dow Jones Industrial Average dropped more than 360 points, the average closed-end equity fund tracked by Lipper returned 3.41% for the month.