Bargains in closed-end funds continued to pile up in September as they reached discounts to net asset values not seen in almost two years.

The median discount on closed-end equity funds tracked by Lipper widened by 134 basis points to 7.04% from a revised 5.70% in August. That was the largest discount since December 2005.

"People were fearful with a number of things going on, especially subprime lending and whether there was going to be some kind of contagion going on," says Tom Roseen, a senior analyst at Lipper. "Then we saw a kind of resurgence (in performance), things turned around and it was a strong month for all categories."

Unlike open-end funds, closed-end funds are not continuously offered. They issue a fixed number of shares that are bought and sold on an exchange like stocks, frequently trading below the value of their holdings.

By the end of the month, just 87 closed-end funds of all stripes were trading at a premium, down from the one-year high of 240 funds trading at a premium on May 31, 2007.

Just 28% of all closed-end funds' discounts narrowed or premiums widened September.

Despite the widening discounts, the rally in the stock market at month's end boosted returns. The average closed-end equity funds tracked by Lipper returned 3.98% for the month, the best one-month performance since November 2004.

Positive earnings reports from companies including Google ( GOOG), Oracle ( ORCL) and Nike ( NKE) made investors optimistic that other companies will post strong results in the coming earnings season, Lipper says.

World equity funds returned an average 6.77%, while domestic equity funds improved by 3.17%. Even closed-end funds that invest in emerging markets, which lost 2.33% in August, got a boost, rallying 10.2%.

The ( ASA) ASA Limited , a sector equity fund, was the top dog, increasing 21.11% during the month and trading at a 12.26% discount to net asset value on Sept. 30.

The next two top performers came from the world equity sector: ( JFC) JF China Region Fund gained 15.59% and closed the month at a 14.81% discount, and ( IFN) India Fund Inc. returned 15.17% and was available at an 8.91% discount.

"International-wise, the story wasn't just better valuations," Roseen said. "One of the big stories there was the spiraling dollar. The amount of weakness was very much a boon for international investors."

In September, the dollar fell 4.1% against the Euro, 1.1% against the pound and 0.7% against the yen.

While most closed-end equity funds went on sale in September, the median discounts on closed-end fund that invest in bonds narrowed by 32 basis points to 5.42% in August, helped by both the Fed's rate cut and investor's desire for the relative safety of fixed income.

World fixed income funds returned 3.28%, while general municipal bond funds and domestic fixed income funds rose by 2.16% and 1.72%, respectively.

"We hadn't seen that type of fixed income performance for quite some time," said Roseen. "We actually saw Treasury yields increased about five basis points (to 4.59%), but it didn't do anything to the returns. The returns stayed really strong."