Go with the experts for closed-end fund tips
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Dear Mr. Berko:
I would like to invest about $30,000 in a portfolio of six or so closed-end funds that trade at a 7 percent to 10 percent discount to the market with a current dividend yield of at least 9 percent. I’ve never owned closed-end funds, but I think they are safer than common stocks and less volatile. If you can select a half-dozen good ones for me, I might be able to make 10 percent to 15 percent in the next 12 or so months as the market recovers.
W.K., Frisco, Colo.
Dear W.K.:
Good luck. Closed-end funds are basically mutual funds that are bought and sold on the big exchanges just like common stocks.
Like regular mutual funds with different portfolio objectives, there are closed-end funds with portfolios that seek long-term growth or invest only in small-cap stocks or write options or only invest in foreign stocks, Ginnie Maes, municipal or corporate bonds, high-yield junk bonds, tech issues, financial stocks, etc.
But unlike regular mutual funds, closed-end funds issue a specific number of shares and are closed to new money once the initial public offering has been completed. Regular mutual funds are called “open-end” funds because their portfolios are always open to new money. When you redeem an open-end fund, you sell it back to the fund. A closed-end fund is redeemed on the exchange from which you bought it.
The other important difference is that open-end funds always trade at net asset value, which is the market value of their portfolio divided by the number of outstanding shares. If your open-end fund has 10 million shares issued and a portfolio market value of $100 million, its net asset value is $10 per share, which is the price at which you buy the fund, plus a commission.
If a closed-end fund has 10 million shares issued and a portfolio of $100 million, its net asset value is $10 per share. However, because it trades like a common stock, the fund could trade at $9 a share. And if that’s the case, it’s trading at a 10 percent discount to its net asset value.
Hypothetically, you could buy all 10 million shares at $9 per share, sell the portfolio for $100 million and make a cool $10 million in the process. On the other hand, the shares of that closed-end fund with a $100 million portfolio could trade at $11, or at a 10 percent premium to net asset value.
There are probably 170 closed-end funds trading at a 10 percent or better discount to net asset value. So asking me to select the best of them is like suggesting that I jump in a huge swimming pool filled with golf balls and pick a dozen of the best balls for you.
But you could consider Van Kampen’s Value Equity and Income Portfolio 2008-2. It’s a unit trust with an 18-month life, automatically liquidating into cash in the fourth quarter of 2009. Van Kampen’s unique idea is to invest in a portfolio of 40 or so closed-end funds with different investment objectives to create the following results:
The unit trust portfolio will have a dividend yield of 9.5 percent. This portfolio will be purchased at a 6 percent to 12 percent discount to net asset value. Each of the 40 or so closed-end funds will have a market cap of at least $300 million, each will have high liquidity, each fund will be leveraged, each fund’s sponsor will have extensive experience in managing the fund’s asset class, and each fund will trade at least $750,000 in market value a day.
If you insist on my picks, check out Advent Claymore Convertible (AVK-$20.04), Dow 20 Premium Dividend (DPD-$17.50), Royce Value Trust (RVT-15.30), Gabelli Deal (GDL-$15.14), BlackRock Real Asset Equity (BCF-$15.06) and Liberty All-Star (USA-$5.75).
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service
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