Closed-End Mutual Funds in Volatile Times

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At 13% to 15%, we find its discount attractive and above 15% very attractive," says Gondor.

The best-run closed-ends are usually the oldest. Bad funds tend to trade at deep discounts and to be targeted by activists. Older funds often have low expenses, high insider ownership, and little or no leverage. One of the only ways closed-ends can increase their asset base is by borrowing money; they can do this for up to one-third of the value of their assets, but it can increase volatility. General American has low leverage, about 15% of its assets.

Another good old-timer is Source Capital. Founded in 1968, the fund traded at 40% to 50% discounts during the '70s bear market. It then caught the attention of investors Warren Buffett and Charlie Munger. "They knew they were buying a dollar's worth of assets for 50 cents and thought if they bought enough they could take over the fund and control its investment policy," says Eric Ende, the fund's co-manager. "They convinced the fund's manager to use an investment approach similar to Berkshire Hathaway's, and it's been run that way ever since." Ende, who has managed Source since 1996, buys companies with strong franchises and economic moats that ensure they remain market leaders. He favors health care and industrials. Over the 10 years ending Sept. 30 the fund had a 12.5% annualized return, beating 99% of mid-cap growth funds. It has a 0.87% expense ratio and 8% turnover.

Other oldies but goodies: Adams Express (ADX) and Central Securities (CET). Adams Express has low expenses and turnover, but its 4.3% annualized 10-year return only just bests the S&P 500. Central Securities, like Source, has been a champ. It delivered an annualized 9.1% over the same period, beating 90% of its peers. It, too, has low expenses and turnover. One unusual aspect: 22% is in the Plymouth Rock Co., a private insurer, which it has held for 26 years.

To have such a large position in a private company would be virtually impossible in a mutual fund, since redemptions could cause the manager to sell an illiquid stock. Uncertainty around valuing private companies has led some investors to avoid Central, so it's often traded at deep discounts even though its valuation techniques are fairly conservative. Manager Wilmot Kidd, 66, is fine with that. He's led the fund for 34 years, his family owns over 10% of it, and he has no plans to retire.

Braham is a freelance writer in Brooklyn, N.Y.