Be open to closed-end funds.These exchange-traded vehicles can garner high returns Buy a top-rated Morningstar fund for 86 cents on the dollar? That's the deal locked in by investors who bought Central Securities (AMEX AMEX See: American Stock Exchange : CET CET abbr. Central European Time CET Central European Time CET n abbr (= Central European Time) → hora de Europa central CET abbr ) at one point this past summer: The fund held stocks worth $39.26 per share yet it traded at $33.875, for a 13.7% discount. Also available were General American Gen·er·al American n. The speech of native speakers of American English that many consider to be typical of the United States, noted for its exclusion of phonological forms readily recognized as regional or limited to particular social groups and for Investors (NYSE NYSE See: New York Stock Exchange : GAM), another five-star fund trading at a 7.8% discount; Tri-Continental (NYSE: TY), a four-star fund priced at 18.8% below market value; and dozens of others with discounts of 20% or more. There is a key difference between mutual funds and closed-end funds Closed-end fund An investment company that issues shares like any other corporation and usually does not redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or below its net asset value. Related: Open-end fund. . Mutual funds are "open-end," meaning that they continually con·tin·u·al adj. 1. Recurring regularly or frequently: the continual need to pay the mortgage. 2. sell shares to and buy shares from investors, receiving or paying a price that reflects the value of their holdings. Closed-end funds have a certain amount of money to invest, from funds raised in an initial public offering. (Additional capital may be raised in secondary offerings.) After their IPOs, closed-end funds trade like stocks, with their trading prices Trading price The price at which a security is currently selling. determined by supply and demand rather than by the value of their underlying securities. As a result, closed-ends usually trade at a discount or a premium to net asset value (NAV See navigation system and navigation bar. ). "Closed-end funds have certain advantages over mutual funds," says Thomas J. Herzfeld, a Miami-based investment advisor Investment Advisor 1. A person making investment recommendations in return for a flat fee or percentage of assets managed, known as a commission. 2. For mutual fund companies, it is the individual who has the day-to-day responsibility of investing and monitoring the cash and whose firm publishes The Investor's Guide to Closed-End Funds ($475 for 12 issues; www.herzfeld.com). "Managers don't have to hold cash to meet possible redemptions, so they can be fully invested in stocks or bonds, which are likely to generate higher returns long term." Gregg Wolper, an analyst at Morningstar Inc., Chicago, says that the closed-end nature of these funds can be a plus. "Closed-ends aren't being forced to buy at market tops, when cash flows in, or to sell into market corrections Market correction A relatively short-term drop in stock market prices, generally viewed as bringing overpriced stocks back to a level closer to companies' actual values. , when cash flows out." Indeed, the performance of dosed-ends has been solid, short and long term. The Herzfeld Closed-End Average is up about 14.46% from the fourth quarter of 1999 while the Dow Jones industrial average Dow Jones Industrial Average The best known U.S. index of stocks. A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange. is flat. "Since we introduced our average in late 1987, it has outperformed the Dow by around 33%," say Herzfeld. Wolper points to another advantage: They have no minimum. In addition, the fact that closed-end funds often trade at a discount to NAV offers investors another way to make money: not only can the prices of the underlying securities go up, the discounts may narrow or even go to a premium. "You should track a dosed-end fund for at least six months before buying," says Herzfeld. "Try to buy when the discount is at least five percentage points wider than the average. If a fund's average discount to NAV is 10%, buy it when the discount is at least 15%."
TOP 5 CLOSED-END EQUITY FUNDS
NAV
Year-to-Date NAV 1 Year
Total Total
Fund Name (Ticker) Return(*) Return(*)
H&Q Life Sciences Investors (HQL) 61.21 123.85
H&Q Healthcare Investors (HQH) 53.75 114.81
Renaissance Growth & Income III (RENN) 32.00 39.84
Invesco Global Health Sciences (GHS) 28.78 39.83
Cohen & Steers Realty Income (RIF) 23.71 12.19
NAV 3-Year NAV 5-Year
Annualized Annualized
Fund Name (Ticker) Return(*) Return(*)
H&Q Life Sciences Investors (HQL) 34.91 25.98
H&Q Healthcare Investors (HQH) 32.63 29.47
Renaissance Growth & Income III (RENN) N/A N/A
Invesco Global Health Sciences (GHS) 22.78 23.05
Cohen & Steers Realty Income (RIF) 1.22 10.74
Premium Telephone
Fund Name (Ticker) Discount Number
H&Q Life Sciences Investors (HQL) -21.0 800-327-6699
H&Q Healthcare Investors (HQH) -27.5 606-327-6699
Renaissance Growth & Income III (RENN) -14.3 214-891-8294
Invesco Global Health Sciences (GHS) -15.6 800-528-6765
Cohen & Steers Realty Income (RIF) -4.2 212-832-3232
(*) As of 7/31/00. Total returns and annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. returns are expressed in net asset value because of closed-and-status. Source: Morningstar Inc. |
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