Closed-End Funds Back On Sale

It didn't help that a large number of new closed-end funds were launched during the year.

Discounts on closed-end funds narrowed in September as bargain hunters stepped in, only to widen again as the year drew to a close.

The market turmoil, combined with a busy period of IPOs, created "a perfect storm for heavy year-end tax-loss selling," says Mariana Bush, closed-end fund and ETF analyst at Wachovia Securities.

She says currently the average discount among all U.S.-traded closed-end funds is 9.9%, more than twice the 4.0% mean over the last decade.

Morgan Stanley issued a report last week saying the historically wide discounts are "attractive buying opportunities."

The report reads like a 24-page spread from Macy's in the Daily News. And some of the discounts, which range from 6.6% to a whopping 13.8%, are as big as those on Macy's racks.

These discounts are pushing yields on some funds to enticing levels. For example, on Dec. 31 the (EXG - Cramer's Take - Stockpickr)Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG) traded at a 12% discount to its NAV per share, for a yield of 11.4%.

That's nearly triple Friday's 3.9% yield on the 10-year U.S. Treasury note, and fourtimes the 2.2% that the Merrill Lynch Master II High Yield Index returned in 2007.

The index, which measures the yield of the junk-bond market, rose 11.8% in 2006, a yield similar to what the Eaton Vance fund now offers.

Paul Mazzilli, Morgan Stanley's director of ETF research and the report's lead author, says 12% discounts are fairly unusual, and that for most funds the floor is about 15%. That's where professional investors typically step in.