Closed-End Funds: The Allure and Pitfalls

By on October 31, 2009

Stan Luxenberg,, has written an article entitled “Closed-End Funds Sell for Bargain Prices.” Luxenberg discusses how closed-end funds can swing wildly between premiums and discounts to Net Asset Value (NAV). He mentions a couple of funds (Gamco Investors’ Gabelli Dividend and Income Fund & SunAmerica Focused Alpha Growth Fund) that look attractive now based on the discount to NAV and the expertise of the managers of the funds (Mario Gabelli and Ron Baron).

SMA Comment: I have personally invested in closed-end funds on many occasions in the past and there are a few held in the SMA portfolio featured at this site. However, investors should be aware of several pitfalls:

  1. There are some obscene expense ratios in this area of the investment universe. It’s not unusual to see funds with expenses over 3 percent per year. Even a large discount to NAV can’t make up for this drag on performance. In my opinion the discount needs to be at least 10 times greater than the expense ratio before I’d be interested.
  2. It’s safer to avoid funds that resort to leverage. During the debacle leading up to March 2009, leveraged funds were decimated. Some funds crashed 90% from their highs.



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