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Discounts on Closed-End Funds Narrow

The median discount shrank in December over November but was still wider than the average for the year.

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."

For the three-month period ended Dec. 31, equity closed-end funds lost 3.03%.

Equity funds were down across the board at home and abroad. Domestic stock funds lost 1.38%, while world equity funds slipped 0.06%.

"The good numbers were seen in the Chinese

closed-end funds," Roseen says, "which is kind of surprising given that they were kind of mediocre returns in the open-end world. Latin American and emerging markets closed-end funds" were also strong.

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Twelve of the top 20 closed-end funds came from Lipper's world equity classification, with three Pacific ex-Japan funds topping the list.

Morgan Stanley China A Share Fund

(CAF) - Get Morgan Stanley China A Share Fund Inc. Report

returned 9.30% while trading at a 25.96% discount at month-end.

Morgan Stanley India Investment Fund

(IIF) - Get Morgan Stanley India Investment Fund Inc. Report

rose 7.82% and sold for a 3.38% discount on the same day, and

Malaysia Fund


rounded out the top three with a gain of 6.76% for the month while selling at a 10.63% discount on Dec. 31.

For the year's final month, 167 equity funds posted negative returns, an improvement on the 247 stock funds with losses in November.

Just 35% of all closed-end funds tracked by Lipper had gains in December, with 436 funds in the red for the month.

"I think we'll be back to good old average returns" in 2008, Roseen says. "Next month is going to be a little bit on the choppy side, and I know there are people who are waiting for January to start so they can start buying."