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Few Bargains in Closed-End Funds

The median discount was at nearly a three-year low at the end of January.

The month of January is known for a lot of things: New Year's resolutions, bad movies, sales on winter clothing. It's also the time of year when bargains on closed-end mutual funds become harder to find.

That was particularly true this year. Shares of closed-end funds tracked by Lipper finished the month at a median discount of 2.73% to net asset value. That represented a narrowing of 0.90 percentage points from the end of December and was the lowest level since February 2004.

Unlike open-end mutual funds, which continuously issue and redeem shares at their net asset value, closed-end funds issue a fixed number of shares that are traded throughout the day like stocks. When a closed-end fund's investment style falls out of favor, its share price can fall below the value of its holdings. Conversely, share prices of funds in a "hot" sector are often bid up to a premium over net asset value.

Discounts on closed-end funds of all stripes tend to widen in December as investors sell losers to harvest tax losses, only to narrow again in January. But the tax-loss selling was less pronounced this past December because so many funds were in the black. That meant there was little interruption in the narrowing trend that has been in place for the nearly the past three years.

For the 12-month period ending Jan. 31, the median closed-end fund discounts narrowed by 4.58 percentage points.

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Simply put, a $9 investment in a fund trading at a 10% discount purchases $10 worth of securities. The bigger the discount, the bigger the bargain. But there are few real bargains left, particularly in closed-end bond funds "In many cases you have to go back five or 10 years" to see discounts this narrow, says Tom Roseen, a senior research analyst at Lipper.

The median discount on closed-end bond funds narrowed by 1.56 percentage points in January to 2.57%. The national municipal bond funds category experienced the greatest narrowing during the month, closing in by 1.87 percentage points to 2.82%, its lowest mark since March 1999. Funds that invest in high-yield municipal debt, which were the only ones in the muni sector to post positive returns in January, sported the smallest discounts, a meager 0.71%.

"Whether it's in REITs or bond funds," Roseen said, the narrow discounts suggest that, above all, "people are still looking for yield, and still looking for capital appreciation."

The median discount on closed-end equity funds actually widened by 1.41 percentage points in January to 3.42% after hitting a five-year low in December. The trend was most evident in world equity funds, where the median discount widened by 1.78 percentage points to 4.46%.

January saw narrower discounts or wider premiums for 58% of all closed-end funds tracked by Lipper, including 72% of fixed-income funds and 31% of equity funds.