When it comes to closed-end funds, you don't want to overpay.

In August, I recommended a closed-end bond fund, ( RMH) Regions Morgan Keegan High Income. At the time, the fund's shares traded at a hefty premium of around 31% to their net asset value, and I advised investors who considered this to be too high to keep it on their radar screen until the premium narrowed.

That's what happened in mid-November, when High Income's manager decided to cut its annual dividend by 1 cent, or 6.67%, to 14 cents, causing a sharp correction in the fund's price as some investors decided it was time to get out. As a result, the fund's premium to its net asset value has fallen to 14%. While this is still relatively high, it's not much consolation for investors who paid even more.

Unlike open-end funds, which issue and redeem shares once a day at their net asset value, closed-end funds issue a fixed number of shares that trade throughout the day on an exchange, like stocks. So their prices can rise and fall independently of the value of their holdings.

As a general rule, it's a good idea to buy a closed-end fund when it's trading at a small discount to its NAV, and if possible you should aim for a discount of 10% or more, just to be safe. Of course, there's no guarantee that a discount will narrow, providing a capital gain, and it could widen even further. But the risk is even greater when you buy at a premium.

So if you already own a fund that's trading at a large premium, or are considering buying one, why not consider moving into an alternative fund with similar or better returns that trades at a discount? The tables below offer some potential alternatives.

Interestingly, the one-month and three-month returns of the top-rated funds trading at a discount to their NAV are, on average, better than those of the top-rated funds trading at a premium. Because the discounted funds are yielding far better total returns, and all of the funds are fairly highly rated, you can pick up a better yield at a discounted price. (Note that price and yield are inversely related; in other words, a lower price generates a higher yield for a given level of return.)
Why Pay A Premium ...
Top-rated funds that trade at a premium to their net asset value as of December 31, 2006
Fund Name Ticker 1 Month Return 3 Month Return 1 Year Return 3 Year Return TheStreet.com Rating Discount (%)
Spain Fund SNF 14.79 29.62 38.48 29.12 B 20.5
BlackRock Strategic Municipal Tr BSD 0.03 1.36 20.21 16.31 B+ 20.11
BlackRock Investment Qual Muni Tr BKN 0.01 2.09 15.98 16.04 B+ 18.02
PIMCO NY Muni Income Fund PNF 3.34 7.04 17.93 13.66 B 15.77
PIMCO Municipal Income Fund PMF 4.4 5.28 17.76 15.16 B+ 15.65
BlackRock NY Inv Qual Muni Tr RNY 4.73 5.64 23.58 12.13 B+ 12.57
Morgan Stanley Muni Inc Opp OIA 2.21 2.76 23.99 16.51 A 11.98
BlackRock Municipal Income Trust BFK 0.9 3.01 19.41 15.46 B 11.94
BlackRock NJ Municipal Income Trust BNJ 0.52 4.75 21.3 15.1 B 11.85
PIMCO CA Municipal Income Fund III PZC -0.09 2.55 16.45 15.01 B+ 11.32
Aberdeen Australia Equity Fund IAF 8.59 16.38 27.56 33.03 B 10.54
BlackRock MuniAssets Fund MUA 4.06 6.09 20.5 18.33 A- 10.12
BlackRock Municipal Income Trust II BLE 1.54 4.61 20.27 16.35 B+ 9.69
BlackRock CA Muni Bond Trust BZA 3.7 2.71 17.91 16.03 B+ 9.48
BlackRock NJ Muni Bond Trust BLJ -3.54 7.34 17.59 15.92 B+ 9.29
BlackRock NY Muni Bond Trust BQH 2.86 5.92 19.05 15.48 B 9.15
BlackRock Municipal Bond Trust BBK 1.18 3.01 14.95 14.9 B 9.03
PIMCO CA Municipal Income Fund PCQ -2.26 3.76 15.95 13.94 B+ 9
BlackRock NY Municipal Income Trust BNY 0.11 2.89 18.21 14.11 B 7.94
Zweig Total Return Fund ZTR 2.86 10.6 27.69 13.66 B- 7.92
Nuveen Muni High Income Opportunity NMZ 0.44 2.11 15.09 0 B- 7.04
BlackRock CA Municipal Income Trust BFZ -1.11 0.23 19 15.55 B 6.93
PIMCO CA Municipal Income Fund II PCK 2.06 5.08 10.55 12.27 B 6.79
BlackRock Apex Municipal Fund APX 3.85 5.26 25.19 15.14 A- 6.4
Royce Value Trust RVT 7.62 14.59 17.29 19.39 B 6.13
BlackRock MuniYield Fund MYD 1.58 5.42 17.32 14.1 B+ 5.86
BlackRock FL Municipal Income Trust BBF 3.15 7.33 15.42 13.14 B 5.81
Source: TheStreet.com Ratings

... When You Don't Have To?
Top-rated funds that trade at a discount to their net asset value as of December 31, 2006
Fund Name Ticker 1 Month Return 3 Month Return 1 Year Return 3 Year Return TheStreet.com Rating Discount (%)
Neuberger Berman Real Est Secs Inc NRO 3.17 15.58 41.67 18.36 B- -14.44
AEW Real Estate Income Fund RIF 1.21 11.14 32.97 20.55 B -14.43
DWS RREEF Real Estate Fund SRQ 3.58 13.95 36.77 27.28 B -14.37
Pioneer Tax Advantage Balanced Tr PBF 1.22 7.18 19.32 0.00 B- -14.29
DWS RREEF Real Estate Fund II SRO 4.39 16.45 40.57 22.10 B -14.28
Neuberger Berman Real Estate Income NRL 2.82 13.68 38.26 27.50 B -13.79
Central Securities CET 2.62 9.47 16.45 16.62 B -13.37
Gabelli Global Multimedia Trust GGT 3.73 17.31 21.93 15.33 B -13.34
Tri-Continental Corporation TY 2.33 9.16 18.50 13.28 B- -13.04
LMP Real Estate Income Fund Inc RIT 5.10 14.19 30.85 21.01 B- -12.58
RMR F.I.R.E. Fund RFR 2.42 10.13 18.28 0.00 B -12.36
SunAmerica Focused Alpha Growth FGF 3.07 12.23 12.61 0.00 B- -11.34
Boulder Total Return Fund BTF 5.18 17.34 26.48 15.16 B+ -10.34
Cohen&Steers Quality Income Realty RQI 0.49 11.59 46.91 25.90 B- -10.06
New Germany Fund GF 4.21 13.24 44.74 29.58 B -10.05
Source: TheStreet.com Ratings

Top-Rated Closed-End Funds That Trade At Premium To NAV
As of December 31, 2006
Fund Name Ticker 1 Month Return 3 Month Return 1 Year Return 3 Year Return TheStreet.com Rating Discount (%)
Spain Fund SNF 14.79 29.62 38.48 29.12 B 20.5
BlackRock Strategic Municipal Tr BSD 0.03 1.36 20.21 16.31 B+ 20.11
BlackRock Investment Qual Muni Tr BKN 0.01 2.09 15.98 16.04 B+ 18.02
PIMCO NY Muni Income Fund PNF 3.34 7.04 17.93 13.66 B 15.77
PIMCO Municipal Income Fund PMF 4.4 5.28 17.76 15.16 B+ 15.65
BlackRock NY Inv Qual Muni Tr RNY 4.73 5.64 23.58 12.13 B+ 12.57
Morgan Stanley Muni Inc Opp OIA 2.21 2.76 23.99 16.51 A 11.98
BlackRock Municipal Income Trust BFK 0.9 3.01 19.41 15.46 B 11.94
BlackRock NJ Municipal Income Trust BNJ 0.52 4.75 21.3 15.1 B 11.85
PIMCO CA Municipal Income Fund III PZC -0.09 2.55 16.45 15.01 B+ 11.32
Aberdeen Australia Equity Fund IAF 8.59 16.38 27.56 33.03 B 10.54
BlackRock MuniAssets Fund MUA 4.06 6.09 20.5 18.33 A- 10.12
BlackRock Municipal Income Trust II BLE 1.54 4.61 20.27 16.35 B+ 9.69
BlackRock CA Muni Bond Trust BZA 3.7 2.71 17.91 16.03 B+ 9.48
BlackRock NJ Muni Bond Trust BLJ -3.54 7.34 17.59 15.92 B+ 9.29
BlackRock NY Muni Bond Trust BQH 2.86 5.92 19.05 15.48 B 9.15
BlackRock Municipal Bond Trust BBK 1.18 3.01 14.95 14.9 B 9.03
PIMCO CA Municipal Income Fund PCQ -2.26 3.76 15.95 13.94 B+ 9
BlackRock NY Municipal Income Trust BNY 0.11 2.89 18.21 14.11 B 7.94
Zweig Total Return Fund ZTR 2.86 10.6 27.69 13.66 B- 7.92
Nuveen Muni High Income Opportunity NMZ 0.44 2.11 15.09 0 B- 7.04
BlackRock CA Municipal Income Trust BFZ -1.11 0.23 19 15.55 B 6.93
PIMCO CA Municipal Income Fund II PCK 2.06 5.08 10.55 12.27 B 6.79
BlackRock Apex Municipal Fund APX 3.85 5.26 25.19 15.14 A- 6.4
Royce Value Trust RVT 7.62 14.59 17.29 19.39 B 6.13
BlackRock MuniYield Fund MYD 1.58 5.42 17.32 14.1 B+ 5.86
BlackRock FL Municipal Income Trust BBF 3.15 7.33 15.42 13.14 B 5.81
Source: TheStreet.com Ratings

Sam Patel, CFA, is the manager of mutual fund research for the TheStreet.com Ratings.

In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.

While Patel cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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