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YOUR GUIDE TO CLOSED-END FUNDSThey look like mutual funds, trade like stocks, and earn some hot returnsYou can build a great investment portfolio with mutual funds. But you may be able to build an even better one if you include closed-end funds. Many of these funds, which invest like mutual funds but whose shares are bought and sold like stock, earn returns that beat those logged by their mutual-fund cousins. To help identify these opportunities, we bring you BUSINESS WEEK's Mutual Fund Scoreboard for closed-end funds. How well the fund's portfolio performed--the net asset value (NAV) return--and how the fund shares fared are outlined. Because prices of these shares are determined in the stock market, they rarely trade at NAV, and quite often trade at a discount. We also rate funds on their three-year risk-adjusted portfolio returns. This year, 17 funds earned three upward-pointing arrows, the highest rating. The ratings and Scoreboard data are prepared by Morningstar Inc. SELECTIVE. There's no better case for closed-end funds than the top-rated Europe Fund. During 1996, the fund's portfolio earned a 35.3% total return, its shares, 34.8%. Either way, the Europe Fund trounced the 30.9% return earned by Scudder Greater Europe Growth Fund, the best-performing European equity fund in the Mutual Fund Scoreboard (BW--Feb. 3). The fund's secret? ''Simply stock selection,'' says portfolio manager Consuelo Brooke at Mercury Asset Management International in London. Its biggest winner last year was Swedish retailer Hennes & Mauritz AB, up 155%. What's more, the fund prospered despite the strengthening dollar. Says Brooke: ''We deal with the dollar by investing in exporters which benefit from it.'' Despite the results, the fund still trades on the Big Board at a 10.1% discount to its NAV. Many closed-end funds are managed by the same people who run mutual funds. The top-performing Salomon Brothers Fund shares a portfolio manager with the open-end Salomon Brothers Investors Fund and had nearly identical returns over the last one- and three-year periods. The main difference: The closed-end trades at a 5.9% discount. The mutual fund charges loads, which can add up to 5% to the cost. While discounts make closed-end funds attractive, they often fail to narrow. Shareholders sometimes lobby a fund to eliminate the discount by reorganizing as a mutual fund. But that's tough to pull off, because many funds' charters require ''supermajority'' approvals of 80% of all shareholders. The best way for a fund to shrink the discount is performance. For instance, as the returns of Central Securities improved over the last five years, the average annual discount narrowed from double to single digits. Last year, this mid-cap value fund traded at a premium to its NAV as high as 7.7%. It's now 1.5%. DISCOUNTS. Some of the highest premiums belong to the bond funds. Cigna High-Income Shares, a top-rated fund, sells at 12.1% above its NAV. The income generated by its portfolio is so great that the yield still comes to 9.7%. Morgan Stanley High-Yield Fund, another top fund, may look like a better buy, with a 1.7% premium. But that fund has only an 8.9% yield. Before paying up for a high-yield fund, Gregg Wolper, closed-end editor of Morningstar Mutual Funds, says to consider the multisector bond funds. Many such funds trade at 10% discounts, which results in yields nearly as high as those selling at big premiums. Brokers don't usually push closed-ends, since the commissions are low, and fund companies opt to spend ad budgets on mutual funds, which can generate higher fees. Perhaps for this very reason, savvy investors should consider closed-end funds for their portfolios.
By Jeffrey M. Laderman in New York
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Updated June 15, 1997 by bwwebmaster
Copyright 1997, by The McGraw-Hill Companies Inc. All rights reserved.
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