Bargains in closed-end equity funds are becoming easier to find as investors become more concerned about lofty valuations in the stock market.

The median discount on closed-end equity funds widened by 33 basis points in May to 3.35%, according to Lipper. It was the second consecutive month of widening and occurred as the S&P 500 moved up 3.49% to close the month at an all-time high of 1,530.23.

Unlike open-end funds, which issue and redeem shares upon request at their net asset value, closed-end funds issue a fixed number of shares that trade on an exchange like stocks. Thus, share prices get bid up above net asset values when an investment style is in vogue, forcing investors to pay a premium. On the other hand, when the market sours on a fund, its share price can fall below net asset value, allowing investors to pick it up at discount.

Equity investors are "very jittery," says Tom Roseen, senior research analyst at Lipper. "Equity funds are widening, and people are more hesitant now and not willing to go out on that risk spectrum too far, and so they're stepping back a bit."

Roseen says the outstanding equity performance so far this year is likely a precursor to a period of volatility. There's typically a seasonal lull in the summer as traders cash in vacation time, so the analyst doesn't anticipate any big changes in the market. Roseen instead expects "a kind of gyration up and down, with not a lot of strong positive movements either way."

Discounts on domestic equity funds widened the most last month, with the median moving out by 135 basis points to 4.36%. The median discount on world equity funds widened by 115 basis points to 8.50%.

Equity funds are bucking the overall trend in closed-end funds -- bargains as a whole are becoming harder to find. The median discount on closed-end share prices to their net asset values narrowed by 24 basis points during May to 1.81%. It now stands at the narrowest lowest level since March 2004, according to Lipper. It was the third consecutive month of narrowing discounts.

The overall trend is being driven by fixed-income closed-end funds, for which the median discount narrowed by 49 basis points to 1.22%.

People's willingness to pay for the yield is the main reason that discounts continue to narrow "to near-record levels," according to Tom Roseen, senior research analyst at Lipper. After all, Roseen notes, closed-end funds are sold on yield. A fund with $20 of assets per share trading at a discount of 10% provides a higher yield to investors than if they paid for the NAV.

In May, 45% of all funds saw their individual discounts narrow, premiums widen or premiums replace discounts; but the figure was just 26% for equity funds compared with 56% for fixed-income funds.

Equity funds weren't the only sector tracked by Lipper in which discounts are widening. Discounts on high current yield funds widened by 93 basis points, and discounts on world income funds widened by 42 basis points.

Those funds "were best performers as a group," Roseen says. "That's part of the reason they're widening. People are just a little bit hesitant of being overseas." But while the international focus is slightly less popular for investors, "I don't see any larger trend there at all."

The median discount on all closed-end funds narrowed by 3.39 percentage points in the 12-month period ending May 31, 2007.