CEFA - Closed-End Fund Association

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President's Corner

Closed-End Funds and Current Market Volatility

September 23, 2008

Tom Dinsmore
Portfolio Manager
Bancroft Fund Ltd, Ellsworth Fund Ltd. President, Closed-End Fund Association

An unfolding Credit crisis has affected most investment vehicles including equities, bonds, foreign exchange, money markets and all asset based markets where leverage is used. This includes, of course, closed-end funds. As we all know by now, the crisis began when several highly leveraged investment programs stopped working in the wake of the home mortgage crisis. The question on investor’s minds is, “What should I do now?” That’s why it is essential to step back, remind yourself of your investment goals and why you invested in a particular security. One of the worst mistakes investors can make is to “sell low” in response to the very type of market fluctuations we are experiencing.

What About CEFs and Leverage?
Closed-end funds utilize a time-tested structure that allows for individuals to invest in financial strategies to fit their investment needs. Some (but not all) Closed-end funds are allowed to use leverage, but they are restricted to no more than 33.3 cents of leverage for every dollar of assets, a level many consider to be conservative. And importantly, since the market crisis began to unfold, many companies took prudent actions to diminish the amount of leveraged investments they owned.

Remember the Track Record
Like all investments during stressful economic times, some strategies work better than others. Many members of the Closed-End Fund Association have weathered multiple business downturns and other challenging times to continue providing investment value. Among our membership are funds such as Adam’s Express, Petroleum & Resources and Tri-Continental which were founded as Closed-end Funds during the 1920’s and which have provided substantial gains and dividends over these many decades.

Volatility Can Create Opportunity
While market downturns are not desirable, they can create silver linings of opportunity. Dividend reinvesting can help lower average costs by purchasing new share at lower market prices. The discount feature of CEFs can also provide the same benefit in a sense, increasing the value of new shares purchased. And of course, lower prices and discounts can often lead to good buying opportunities for educated investors.

Do Your Homework
Each closed-end fund uses different approaches to managing their investments such as leverage and exposure to different economic sectors. These approaches will affect that fund’s performance and income and should be understood by every investor whenever they make a decision to add to or reduce their holdings. The fact that past performance is no guarantee of future returns makes it even more important to take some time to get and study the information available on these investments. It will be time well spent and can help make for better investment decisions.

Tom Dinsmore
President,
Closed-End Fund Association

If you have any questions or comments, please contact us at cefa@cefa.com.