In today's low-rate world, Eaton Vance pays less than 1% to borrow and uses the proceeds to buy securities with yields of 2% or 3%. As a result, the yield of the fund has increased. The closed-end fund yields 6.5%, while its open-ended peer yields only 4.1%.

Leverage has worked beautifully in the current environment. When rates fall -- as they have recently -- most bond funds rise, but leveraged portfolios do especially well.

"Leverage magnifies the gains of funds when their asset class is doing well," says Cara Esser, a Morningstar closed-end analyst.

Leverage has helped Calamos Convertible & High Income ( CHY). During the past five years, the fund has returned 6.0% annually.

In comparison, Calamos Convertible ( CCVIX), an open-ended mutual fund, returned 1.9%, and the average convertible mutual fund returned 1.0%.

The Calamos closed-end fund is especially attractive now because it sells for a discount of about 2%. That means an investor need only pay 98 cents for $1 of assets.

Over the years, the price of the Calamos closed-end fund has fluctuated, moving from discounts to premiums as the mood of investors changed. As recently as May 2011, the Calamos fund sold for a premium of 1.7%.

Savvy investors aim to buy closed-end funds when market sentiment is poor, and the funds sell for discounts. By holding until the funds revive and sell at a premium, traders can score big profits. But funds that trade at discounts can be volatile. In downturns, the shares can fall well below fair values.

Among the most notable bond managers of recent years is Michael Hasenstab. He is best known for his flagship Templeton Global Bond ( TPINX), an open-ended mutual fund that has attracted a flood of assets after delivering strong results. During the past five years, Templeton returned 8.9% annually.

But that strong result was topped by Templeton Emerging Markets Income ( TEI), a closed-end fund that is also run by Hasenstab, which returned 13.0% annually.

The portfolios of the two funds are somewhat different. By charter, the closed-end fund must focus on the emerging markets, while the open-end mutual fund can invest anywhere in the world. But lately Hastenstab has been shunning troubled economies in the developed world and focusing on emerging economies in Latin America and Asia.

Hasenstab has excelled by making bold moves and taking concentrated positions. The strategy has proved particularly effective in the closed-end fund, which does not use leverage.

At the time of publication, Luxenberg held no positions in funds mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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