Closed-End Funds Offer Solace for 'Cruel, Cruel Summer'

NEW YORK ( TheStreet) -- Craig Johnson, a managing director with Piper Jaffray Companies ( PJC), a brokerage firm, warned clients in late May that "a stealth correction has been unfolding" in the stock market that will result in a "cruel, cruel summer." Johnson's warning emanates from concern that small caps will drag down the Dow Jones Industrial Average ( DIA) and the S&P 500 Index ( SPY). No matter how the financial markets proceed in a "stealth" or more tangible correction, closed-end funds offer profitable buys for growth, value and income investors.

Closed-end funds are similar to mutual funds but with a limited number of shares set from the initial public offering. Mutual funds have an unlimited number of shares that rise and fall based on the value of the assets. The share price for closed-end funds rise and fall based on demand, just like an equity. Due to the complexity of a closed-end fund, the share price will generally fall more than it would for a comparable stock or exchange traded fund when the industry is in disfavor with investors.

This allows for growth, value and income investors to profit when opportunities in closed-end funds arise from market fluctuations.

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A current example is with closed-end funds for China: Aberdeen Great China Fund  (GCH), China Fund (CHN), JPMorgan China Region Fund (JFC) and MS China A Share (CAF) are all off as the outlook for China is not as bullish as before. Of the four, all are trading at a significant discount to the net asset value as shown by the chart below. All are also well below the five-year high for each. Long story short: China is not going bankrupt. Eventually these closed-end funds should rise, rewarding savvy investors buying on the dip as Chinese securities are not currently in favor.

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