Closed-end funds can help refresh a stale portfolio

Sometimes different can be better.

Investors bored with conventional stock mutual funds and willing to do a little homework can spice up their portfolios with the hybrid known as a closed-end fund.


It can emphasize a specific country, region or investment strategy. Last year, the average closed-end fund had a total return of more than 21 percent, boosted mostly by emerging markets. Returns have been a bit choppier this year because of overseas volatility, but the potential remains.

Investors are catching on. The number of closed-end funds has grown to more than 500 with assets of nearly $140 billion from 54 with $7 billion in assets in 1985.


"Closed-end funds offer the only way for the average investor to play some emerging markets," said Colin Matthews, closed-end fund analyst with Morningstar's investment advisory. "The high returns of 1993 show that you can't ignore closed-end funds or you'll miss out on those sorts of periods."

Unlike a conventional open-end mutual fund that issues unlimited amounts of shares and redeems them on demand, a closed-end fund issues only a fixed number of shares at an initial public offering. These shares are then traded on the New York, American or Nasdaq exchanges just like any public company. Shares are bought through a stockbroker and regular brokerage commission charges must be paid.

An advantage of a closed-end fund is that it often permits investors to buy assets for less than their true value. That's because the fund's share price on the exchange will fluctuate and differ from the net asset value (NAV) of all the securities in its portfolio. A fund that's selling for a stock price higher than its NAV is trading at a premium, while a fund selling for a price lower than its NAV is trading at a discount.

"It's easy for the average investor to be impressed with closed-end funds investing in emerging markets, but you've really got to check the net asset value for the premium you'll be paying," advised David Schachter, vice president with Thomas J. Herzfeld & Associates, which tracks closed-end funds. "While emerging markets funds were selling at substantial discounts in 1990, the really hot markets now have premiums as high as 20 percent."

Because of those high premiums, a domestic equity fund selling at a discount may be a better deal in the long run than an emerging market fund, Schachter believes.

Managing a closed-end fund is different from an open-end mutual fund because of its stable pool of assets. "A plus of a closed-end fund is that it makes a long-term strategy possible because investors aren't constantly taking their money away," said William Gedale, president of General American Investors, established in 1927 to rank as the nation's oldest closed-end fund.

Some attractively priced closed-end funds include:

* General American Investors (recently selling at nearly a 13 percent discount to net asset value), which is playing long-term trends such as Chiron Corp. in biotechnology.


* H&Q; Healthcare Investors (4.5 percent discount), emphasizing convertible debentures and preferred stock, likes Genzyme Corp. and Calgene Inc. Portfolio manager Alan Carr reaped huge rewards from start-up investments such as Tropical Cures.

* Jundt Growth Fund (9 percent discount), picking the 30 to 50 fastest-growing companies it can find, has lately owned Oracle Systems Corp., Vodaphone Group PLC and Telefonos de Mexico.

* Latin American Discovery (1 percent discount), a contrarian fund that likes controversial economies such as those of Brazil and Peru, owns stock in Telebras, Grupo Financiero Bancomer and Grupo Financiero Banacci.

* Emerging Mexico (2 percent discount), encouraged by the North American Free Trade Agreement, holds stock of Grupo Industrial Bimbo, which has a joint venture with Sara Lee Corp., ++ and Cifra, which is in a joint venture with Wal-Mart Stores.

Other attractively priced closed-end funds are Salomon Brothers Fund (12 percent discount), Tri-Continental Corp. (14 percent discount), MFS Charter Income (10 percent discount) and New Germany Fund (10 percent discount).