Douglas G. Ober, Chairman, Adams Express Company and Petroleum & Resources Corporation President, Closed-End Fund Association

Readers may recall the show business legend of the performer who toils in obscurity for years before being hailed as an “overnight success.”  That was some long night, the star murmurs.  In a similar way, closed-end funds have found themselves in the spotlight as newly worthy of investors’ attention.

During one week this summer, Barron’s and the Morgan Stanley Equity Research report both extolled the merits of closed-ends.  Theresa Carey’s “The Electronic Investor” column in Barron’s of July 18 provided a web roadmap to closed-end fund information and Morgan Stanley provided analysis on closed-ends in general and on the specific funds it follows.

Ms. Carey noted there are excellent reasons to buy closed-ends: “The funds sometimes trade at prices below the value of their underlying holdings…That’s always been the attraction of closed-ends, and shopping for funds at a discount is one of the oldest investment tacks.”

Barron’s noted one advantage that closed-end fund managers have over mutual fund counterparts is that their portfolio management is not affected by investor redemptions. Mutual fund managers often must sell shares to fund redemptions while in the closed-end world all transactions are between investors. The net asset value of closed-end funds is not directly affected by sales or purchases of their shares.

The first example Barron’s cited of a website suitable for investor research into closed-ends was…drumroll, please…the CEFA site you are currently viewing.  You are visiting the website the Barron’s article noted is worth a look for its timely news and research and its weekly roundup of fund performance.

Barron’s also pointed to the website ETFconnect (www.etfconnect.com) as a source of information on closed-ends that share the information platform with exchange traded funds (ETF).   Links are provided to funds’ own websites, which the article noted are often the best sources of information.

The Morgan Stanley report on closed-end funds of July 13 was headlined “Opportunities in Favored Markets at Discounts.” The firm said it liked the access many closed-end funds provide to favored markets, particularly in the energy, financial and healthcare sectors.

Other closed-end funds’ positives included the excellent NAV performance turned in by many in the Morgan Stanley universe, and the value of equity dividends following creation of the maximum 15% tax in 2003. 

Favorable characteristics of the closed-end equity fund market may be summarized in three characteristics:

• Durability: Closed-end funds are among the oldest types of investment companies and today comprise a $259 billion industry.
  
• Professional diversity:  Many investors seek closed-end funds because they offer relatively low-risk, broadly diversified portfolios with professional management.
  
• Efficiency: According to Morgan Stanley, many closed-end funds have lower expense ratios than their counterpart mutual funds.  As indicated above, the net asset value of closed-ends is not affected by the purchase or sale of their shares.  Thus, recurring marketing expenses as well as trading, accounting and reporting costs are usually very low for close-end funds.

None of these points about closed-end funds are new to us but it’s nice to see their acknowledgement in significant financial media.