How Closed-End Mutual Funds Can Save You Money

Harry Domash |

Closed_sign.jpgIf you had purchased shares of Morgan Stanley India Investment ($IIF) a year-ago, you would have enjoyed an 80% return over those twelve months. MS India Investment is a “closed-end fund” or CEF, which is a special type of mutual fund. Here’s why you should consider CEFs.

Conventional mutual funds are technically “open-end” funds. When you buy an open-end fund, you purchase shares directly from the fund, even if you buy through a broker, The price you pay, the net asset value (NAV), is the value of the fund’s holdings (assets), expressed on a per-share basis, regardless of how many investors want to buy or sell its shares.

The downside for open end funds is that the fund managers must find places to invest new money coming from newly created shares when investors are net buyers. Conversely, when sellers outnumber buyers, the manager must sell shares he or she might not want to sell to raise cash to redeem the shares.

By contrast, closed-end funds sell a fixed number of shares via an initial public offering (IPO). After that, the fund trades just like a stock. Buyers must purchase from existing shareholders, and shareholders must find a buyer if they want to sell. Since the funds themselves are not involved in those transactions, CEF fund managers can execute long-term strategies without worrying about raising cash to redeem existing shares or investing unexpected new cash.

The Supply and Demand Benefit

Here’s another advantage of closed-end funds. Unlike open-end funds, CEF share prices reflect the balance of supply and demand. They rarely trade at their net asset values. Instead, they trade either above (premium) or below (discount) to their NAVs. In practice, most closed-end funds trade at discounts, typically 5% to 10% below their net asset values. So, if a fund trades at a 10% discount, you can get $100 worth of assets for $90. The Morgan Stanley India Investment fund that I mentioned earlier recently traded at 9% discount.

Here are four more high-performing closed-end funds trading at 8% or higher discounts. These particular funds also pay regular dividends.

Morgan Stanley China A ($CAF): Holds a diversified portfolio of large-cap China-based companies. The fund returned 51 over the past 12-months. It’s currently trading at an 11% discount to its NAV, and pays a 5.6% dividend yield.

Cohen & Steers Quality Income Realty Fund ($RQI): Holds U.S. based real estate investment trusts (REITs) that own various types of commercial real estate properties. It returned 40% and is trading at a 13% discount. Dividend yield is 6.2%.

John Hancock Tax-Advantaged Dividend Income ($HTD): Holds bonds and preferred stocks mostly issued by U.S.-based utilities. Returned 33% and is trading at an 8% discount. Yield 6.3%.

Dreyfus Muni Bond Infrastructure ($DMB): Holds federal tax-exempt bonds issued to finance development of U.S. infrastructure projects. Returned 27% and is trading at an 8% discount. It’s paying federal tax-exempt dividends equating to a 6.2% yield.

Just because U.S. real estate investment trusts as well as India and China stocks were hot last year, doesn’t mean that they’ll repeat that performance this year. As always, past performance doesn’t necessarily predict the future. Do your due diligence. The more you know about your holdings, the better your results.


For tips and information on the best utilities and dividend stocks from Harry Domash, please check out Dividend Detective

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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