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Closed-end funds deserve an open mind

roeder report

David Roeder reports on real estate at 6:22 p.m. every Thursday on Newsradio 780 and 105.9 FM WBBM. The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday.

Updated: November 3, 2011 11:42AM



Down a lot, up a little, down some more — the market’s palpitations force a new look at an investment that provides portfolio diversity, often with the satisfaction of an income stream. It’s the closed-end fund, and it doesn’t get a lot of attention from financial media.

Perhaps it’s because the name sounds like a dungeon. Or maybe not enough financial advisers pay attention to closed-end funds.

These funds invest in stocks or bonds, sometimes a specific sector, and trade like a stock.

The number of shares is finite, which is a key difference from “open-ended” mutual funds.

Closed-end funds are actively managed, unlike a more recent invention, the exchange-traded fund.

Closed-end funds typically trade at a discount compared with the value of the assets they own, and the reason is a bit of head-scratcher. Call it market psychology coupled with the risk of betting on some fund manager.

But in times of volatile markets, the discounts often widen to 10 percent or more. That occurred the last few weeks, although the discounts have recently narrowed, said Mike Taggart, director of closed-end fund research at Morningstar.

He said that while some funds are priced attractively, there aren’t the widespread bargains that prevailed during the big Wall Street retreat of 2008.

Taggart said investors need to check if the fund discount or premium varies much from long-term averages.

Morningstar’s website provides a free tool, called Quickrank, to help with fund comparisons.

Another useful site is Cefconnect.com, which is run by Chicago-based fund manager Nuveen but provides unbiased information on all issuers.

Closed-end funds also can generate significant income, in part because they don’t have to keep cash on hand for redemptions the way mutual funds do.

They also can boost income with leverage — trading options or futures tied to the holdings — but Taggart said that increases fluctuations in the share price.

The Nuveen Equity Premium Income Fund (XJPZX), for example, writes call options on its stocks and is paying an annual distribution rate of 11.12 percent. Tax-free bond funds from Pimco and other providers are good for distribution rates of more than 7 percent.

Check the leverage ratio to make sure it involves no more than a third of the portfolio.

For a lot of investors, the combination of decent values and income from these funds is a combination hard to beat.

HOW TO PLAY MOTO: The Google (GOOG) acquisition of cell phone outfit Motorola Mobility (MMI) promises to be a wireless game-changer. Here’s how analysts Anil Doradia and Brian Nugent at William Blair & Co. assess the fallout for other companies:

† It’s a positive for Research in Motion (RIMM), Apple (AAPL), Nokia (NOK) and Microsoft (MSFT) and slightly positive for Qualcomm (QCOM). They see RIMM as a takeover target, with Oracle (ORCL), Samsung (SSU.SG) or IBM (IBM) as buyers. Other users of Google’s Android system probably will turn to another provider, helping Nokia or Microsoft.

† It’s a negative for Android partners such as Samsung, LG (LGLG.DE), HTC, Sony (SNG) and Ericsson (ERIC). Another loser is InterDigital (IDCC), which some thought GOOG would buy for its patents. With MMI, GOOG would swim in patents.

WILLIS POWER: Willis Group Holdings (WSH), the company that has affixed its name to what some of us still say is Sears Tower, has seen a pullback in its stock price recently, but that could mean a buying opportunity.

William Blair & Co. analysts said the insurance brokerage is set up for a better 2012. They said the company is centralizing policy service centers to save money, has a strong position in developing nations and is reducing its debt.

“The stock should begin to move off recent lows as the evidence of the restructuring program becomes more evident,” the Blair team said in a report. WSH closed Friday at $35.93 after trading most of the summer at more than $40.

OBSTINATE ESTIMATORS: When stock analysts get a projection wrong, they often don’t admit it and stubbornly stick to their views, according to research by John Beshears of the Stanford Graduate School of Business and Katherine Milkman of the Wharton School at the University of Pennsylvania. They concluded that analysts digging in their heels could contribute to market booms and busts.

Once it’s obvious an analyst is wrong, he or she is slower than others to adjust their forecasts, the researchers said.

So be careful when investing based on earnings projections. Those calls might come from the heart and not a chart.

CLOSING QUOTE: “Because its public debt stands at 1.9 trillion euros (120 percent of GDP), Italy is ‘too big to bail out.’ Simply put, for economic and political reasons, without Italy, the European Union is no more, at least not in its present form.” —Adolfo Laurenti, deputy chief economist, Mesirow Financial, in an article about why he thinks European debt is a spreading crisis



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