Guest Columnist Jeff Margolin, Vice President, Closed-End Fund Analyst First Trust Advisors, LP

The fourth quarter of 2005 was the worst fourth quarter for closed-end funds since the last three months of 1994 and 1999. Closed-end funds sold off primarily as a result of year-end, tax-loss selling. Tax-loss selling is when investors sell securities to realize losses in order to offset gains within their portfolios. Despite the very solid rebound in closed-end funds thus far in 2006, many investors still have vivid memories of the volatility experienced at the end of last year. The question on the mind of many closed-end fund investors is whether or not this year's fourth quarter tax-loss selling will be as bad as last year’s and take away a lot of the gains we have achieved in the first nine months of the year.

It is my contention that the short-answer is "No." This year’s fourth quarter tax-loss selling season will likely not be as bad as last year’s was for the closed-end fund marketplace. Why? I don’t think it will be as bad as last year simply because closed-end funds have performed much better thus far year-to-date and there are fewer losses for investors to take. However, there will likely be some tax-loss selling and enhanced volatility for closed-end funds in the fourth quarter (there almost always is) and investors need to be prepared for this enhanced volatility that we could potentially see over the next few months. Investors might also take profits in closed-end funds in the fourth quarter which could also lead to some short-term downside volatility.

I believe if we do have volatility this fourth quarter, it will provide another good opportunity to buy closed-end funds and take advantage of the seasonal trading weakness which is usually temporary. Investors who panicked and sold during last year’s fourth quarter have missed out on some very good returns this year among many closed-end funds. The investors who were contrarians and realized that the tax-loss selling was just a temporary phenomenon and bought closed-end funds in the fourth quarter are sitting on some very solid gains. We would once again encourage investors to be contrarians and buy closed-end funds if we have a lot of weakness in the fourth quarter as a result of year-end selling.

Lastly, due to the fact that closed-end funds can exhibit periods of high volatility, investors are encouraged to maintain a long-term time horizon and exposure to different types of funds.

All opinions expressed constitute judgments as of the date of release, and are subject to change without notice. There can be no assurance any forecasts will be achieved. The information is taken from sources that we believe to be reliable but we do not guarantee its accuracy or completeness.  First Trust Advisors L.P. • 1-630-915-6784  www.ftadvisors.com • www.ftportfolios.com



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