Discounts on Closed-End Funds Narrow

Discounts on closed-end funds narrowed in December for the first time in four months as investors held their positions in a volatile market environment.

The median closed-end funds tracked by Lipper closed the month at a 9.90% discount to the value of its holdings, compared with 10.33% below at the end of November.

Closed-end funds issue a fixed number of shares that trade on an exchange, like stocks. When markets are roiled, they can sell off faster than their holdings; conversely, when markets are rising, they can appreciate faster than their holdings.

The median December discount was much wider than the 2007 average discount of 5.30%.

On Dec. 31, just 46 closed-end funds were trading at a premium to NAV, down from the one-year peak of 240 funds on May 31, 2007.

Roughly 60% of all funds experienced narrowed discounts or widened premiums during the month.

A solid holiday shopping season failed to offset fears about a recession, political uncertainty in Iran and Pakistan and unease about liquidity, as the average closed-end equity fund covered by Lipper lost 1.16% during December.

"You know the old concept called the Santa Claus rally? Well, Santa didn't come," says Tom Roseen, senior research analyst at Lipper. "Maybe a day or two, but usually, you count up the last five or six trading days of the year and the first two of the new year. It suggests a little doom and gloom may be coming up."