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March, 2005

EQUITY FUNDS AT A DISCOUNT
by LARRY

There have been a number of studies showing the advantages in the past of purchasing closed-end stock funds (stock CEFs) when they are selling for less than net asset value (NAV). Per such "backtesting," it is generally advantageous to one's pocket book to buy closed-end funds (like mutual funds, but traded on the major exchanges as if they were stocks) at a discount and holding them till the price to NAV is closer to true value or to buy them when their prices are the most below net asset value and "rebalancing" periodically, such as monthly, quarterly, or annually, selling, for example, when they are no longer among the top 5 or 10 discounted CEFs.

On average CEFs tend to perform about the same as the stock market, but less buy-sell spreads, commissions, and management fees. So long as the assets' discounts to net asset value are greater than the sum of these "frictional costs," CEFs usually wind up having total returns in excess of the market, since the discount allows for purchase of $1 worth of equity at less than $1 in price, and purchases tend, over time, to achieve in price at least their true value.



Some closed-end funds, particularly those invested in foreign stocks, normally do better than domestic funds if the US dollar is falling relative to major competing currencies such as the euro or yen. Accordingly, when buying CEFs I like to put at least some of my investment into global or international stock closed-end funds with a discount to NAV. This is reflected in the suggested CEF portfolio below.

A fairly low risk strategy with which I'm comfortable is to purchase 10 CEFs at a time and hold each of them for 12 months, or until the group as a whole is up by 10% or more, whichever is first, and then to rebalance.

While past results offer no assurance of future returns, an average long-term annual compound total return in the 12-15% range (before taxes) is probably not an unreasonable expectation for this approach.

Information on CEFs is readily available through "Barron's" and "Nuveen Investments."



Based on recent prices and net asset values, the following ten CEFs look attractive to me now (and I encourage the reader to perform his/her own due diligence to see if they would be appropriate for addition to her/his holdings):

Closed-End FundSymbolRecent
Price		NAVP/NAVYield
Equus Fund IIEQS$8.00$10.350.777.1%
First Tr. Value Line & Growth Fd.FVI$20.31$23.730.860.2%
Tricontinental Corp.TY$17.90$21.320.841.1%
AIM Select Real Estate Income Fd.RRE$15.87$18.580.857.8%
Gabelli Global Multimedia TrustGGT$10.26$11.990.861.2%
Neuberger Berman Realty Income Fd.NRI$16.99$19.870.867.9%
RMR Hospitality & Real Estate Fd.RHR$18.64$21.790.868.1%
Latin America Equity Fd.LAQ$21.42$25.360.842.1%
New Germany Fd.GF$9.45$11.070.852.5%
Swiss Helvetia Fd.SWZ$14.73$17.270.854.9%

(All data based on 3/16/05 quotes.)


If your main interest is in income, you would be in luck with the above portfolio. There's much variation between the CEFs, but they average yields of 4.3%, well above the market's.


DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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