YES, THERE ARE STILL BARGAIN BOND FUNDS
Closed-end bond funds looked very attractive to fixed-income investors last summer. Many municipal, government, and high-quality corporate funds were trading at discounts of as much as 4.7% from their net asset value (NAV). Then, as the bond rally shifted into high gear, many big discounts disappeared. That was especially true among closed-end municipal funds, where tax-free yields were at record highs vs. those on Treasury bonds. But that doesn't mean all the opportunities have dried up. ''There are still funds with good discounts that represent value,'' says analyst Maria Ketchledge at CDA/Wiesenberger, a financial information firm in Rockville, Md.
Ketchledge especially likes investment-grade corporate funds, such as Van Kampen Bond. It's trading at a 5.3% discount to NAV, with a yield of 6.9%. The intermediate-term Dean Witter Government Income Trust, meanwhile, has a 6.7% discount and a yield of 6.4% (table).
Unlike open-ended mutual funds, a closed-end fund trades on a stock exchange and may sell for more or less than NAV. A variation on a closed-end bond fund is the closed-end term trust, which matures on a specified date. When that occurs, shareholders get back the fund's NAV. Investment adviser Ron Roge, president of R.W. Roge in Bohemia, N.Y., has encouraged clients who piled up big gains in this year's Treasury rally to sell their bonds, put the proceeds into a closed-end bond trust trading at a discount to NAV, and hold it until it matures in five years or so. That way, they can capture the return between the discount and the price at maturity, all the while enjoying the income the trust throws off. Of course, investors must feel confident they can offset the transaction costs and taxes incurred by cashing in their appreciated Treasuries.
If you buy a closed-end bond fund, you'll have to pay commissions on your purchase and any sale. If rates move higher, the market value of these funds will drop, and their liquidity may dry up. But the bond market is sound now--and heaven knows how long closed-end discounts will last.
By Chip Norton
Updated Dec. 10, 1998 by bwwebmaster
Copyright 1998, Bloomberg L.P.