International funds have been on a three-year tear, and Latin America has been the best destination for international investors in that time.

We all know the mantra of the mutual fund industry that past performance is no guarantee of future results. But that's not to say there's no value in taking a look back. Ratings has compiled a list of the 25 top-performing closed-end funds (exchange-traded funds not included) for the three years ended April 30. The investment destinations blanket the planet.

Latin America was the focus of the top three performers for the period, each of which rewarded their holders with returns averaging more than 50% per year.

A trio of other funds from that region also populate the list, making Latin America tied for first place for the most entries on the top 25 list.

The Asia-Pacific region also placed six members on the closed-end top 25.

Eastern European funds captured positions four through six, just below the Latin American top performers. Aside from the Latin gains, those focusing on the former Soviet-dominated region were the only funds to produce total returns of more than 40% annually.

With portfolios focused primarily on Latin America, Asia and Eastern Europe, two diversified emerging-markets funds added to the popularity of those regions as the best closed-end investment destinations.

Domestic investing paled in comparison, as only four U.S. closed-end funds made the list. All but one of those were real estate funds, and they occupied places 18 through 21 on the top-25 roster.

Rounding out the geographic distribution in the table below are a German and an Irish fund. They captured the last two spots among the top 10 performers.

Three-Year Closed-End Fund Leaders
Name, Ticker and Ratings Grade 3-Yr. Annual Market Return (%) 3-Yr. Annual NAV Return (%) Market Return Advantage (%) 3-Yr. Avg. Premium/Discount (%) Current Premium/Discount (%)
Latin American Discovery Fund (LDF) B 59.05 54.52 4.53 -10.61 -7.34
Latin America Equity Fund (LAQ) B+ 58.41 53.94 4.47 -11.93 -9.84
Mexico Equity & Income Fund (MXE) C+ 57.35 51.09 6.26 -9.89 16.40
Templeton Russia & East European Fund (TRF) C+ 47.43 45.85 1.58 10.61 2.91
Central Europe & Russia Fund (CEE) B 43.82 40.44 3.38 -8.62 -13.02
Morgan Stanley Eastern Europe (RNE) C 41.14 40.16 0.98 0.17 -8.87
Aberdeen Australia Equity Fund (IAF) A 39.67 28.78 10.89 1.73 6.50
Morgan Stanley Emerging Markets (MSF) B- 39.05 35.84 3.21 -9.91 -9.16
New Germany Fund (GF) B+ 38.83 32.57 6.26 -12.22 -8.56
The New Ireland Fund (IRL) B+ 38.37 30.96 7.41 -9.61 -0.33
Emerging Market Telecom Fund (ETF) B+ 38.09 33.22 4.87 -11.93 -2.17
Indonesia Fund (IF) C 37.67 33.15 4.52 5.30 5.04
Canadian General Investments Ltd C+ 37.36 33.76 3.60 -15.94 -17.43
Greater China Fund (GCH) C+ 37.34 38.97 -1.63 -6.56 -12.65
Herzfeld Caribbean Basin Fund (CUBA) B- 36.72 25.28 11.44 1.44 22.20
Mexico Fund (MXF) A 35.98 41.27 -5.29 -12.03 -13.60
Chile Fund (CH) B- 35.19 34.08 1.11 -2.07 -6.80
ING Clarion Glob Real Est Inc Fd (IGR) B 34.84 37.31 -2.47 -7.14 -5.51
Boulder Growth & Income Fund (BIF) B+ 34.48 13.99 20.49 -4.73 44.70
Cohen & Steers Premium Income Realty (RPF) B+ 33.42 31.61 1.81 -8.92 -4.61
DWS RREEF Real Estate Fund (SRQ) B 33.34 32.99 0.35 -13.79 -8.89
Singapore Fund (SGF) A 33.09 29.78 3.31 -11.43 -11.60
Third Canadian General Invst Tr C+ 32.99 32.48 0.51 -15.81 -10.25
Morgan Stanley India Inv Fund (IIF) C+ 32.56 36.94 -4.38 4.69 -11.26
Korea Fund (KF) C+ 32.43 28.06 4.37 -6.74 -5.43
Includes Data as of 4/30/2007.
Source: Ratings

Adjacent to the total annualized three-year market performance is the performance of each fund's net asset value (NAV) per share -- the value of its underlying investments -- for the period. As might be logically expected, above-average performance for a closed-end fund is achieved when investor optimism results in its market price being bid up at a rate higher than the value of its assets.

But with four of the winners, as indicated with negative values in the "Market Return Advantage" column, this wasn't the case. The numbers in that column show the difference, in percentage points, between the total-return market performances and NAV returns of the funds.

Also, the impressive performances were generally not the result of funds transitioning from discounts to premiums of price vs. net assets. As the column of average premiums and discounts shows, 19 of the 25 funds have been averaging discounts over the past three years.

Only three of the funds with three-year average discounts managed to end up with premiums as of the end of April. The Templeton ( TRF) Russia and East European Fund (TRF) jumped from an average discount of 9.89% over the past three years to a recent premium of 16.40%, while the Boulder ( BIF) Growth and Income Fund (BIF) rocketed from an average discount of 4.73% to a hefty premium of 44.70%. The ( SGF) Singapore Fund (SGF) reversed its average discount of 11.43% to end the month at a premium of 11.60%.

However, two funds made the top-performer list despite moving from three-year average premiums to end-of-April discounts. The Morgan Stanley ( RNE) Eastern Europe Fund (RNE) averaged a modest premium of 0.17% over the past few years but then tumbled to a discount of 8.87% in April. The Morgan Stanley ( IIF) India Investment Fund (IIF) achieved an annual market return of 32.56% despite moving from a three-year average premium of price over NAV of 4.69% to an April discount of 11.26%.

Closed-end funds priced at discounts from NAV suggest more price appreciation potential than funds selling at a premium to their respective NAVs. But discounts can persist for uncomfortably long stretches.

Of 538 closed-end funds -- again, not counting ETFs -- with at least three years of history on Ratings' database, 400 have stood at average discounts over the past three years. For the past five years, the total is 298 funds with average discounts for the period out of 413 with half a decade of history. For 10 years, it is 243 funds whose prices averaged discounts during the period out of 314 with sufficient price histories.

So the fact that 19 of the top 25 closed-end performers had three-year average discounts doesn't necessarily mean that funds should be necessarily be chosen because they are priced at discounts.

A selection of 25 closed-end funds at random would result in roughly 76% -- 19 out of 25 -- with three-year average discounts. As the above numbers indicate, 74.3% of all closed-end funds had three-year average discounts, 72.2% for five years, and a dispiriting 77.4% have averaged in the discount range for the past 10 years.
Richard Widows is a financial analyst for Ratings. Prior to joining, Widows was senior product manager for quantitative analytics at Thomson Financial. After receiving an M.B.A. from Santa Clara University in California, his career included development of investment information systems at data firms, including the Lipper division of Reuters. His international experience includes assignments in the U.K. and East Asia.