Would someone explain the difference between closed-end funds and straight ahead mutual funds to me? My closed-end funds took an enormous hit while my managed (not index) mutual funds only took hits that seem to be commensurate to the times we're in. Thanks in advance.
-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.
Did your closed end funds go to a big discount to Net Asset Value (NAV)? Open end funds are always priced at NAV while closed end funds can be at significant premiums or discounts to NAV. Worst case is to to pay a premium for a closed end fund and then see it go to a discount in a down market.
Without telling us which closed end and open end funds you have we can only guess at why they performed differently.
-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.
Closed end and open end funds are both types of mutual funds. In an open end fund, when someone buys a share, a new share is created, you get ownership of that share, and the net asset value is set based on your fraction of the total value of the fund.
A closed end fund starts with a fixed basket of stocks and bonds, then establishes a fixed number of share. There is an IPO, much like a new company going public. The shares are sold, and they trade on the market like stocks.
Key behaviors of closed end funds are that they often sell for a premium at IPO, but later sell at a discount because they are thinly traded. Also due to being thinly traded, they are harder to get rid of, so they often drop more in value than their NAV. They also tend to not be actively managed, so if they get a dog stock in the mix, they can ride it down to zero.
The attraction to closed end funds is that they often sell for a discount compared to NAV. The idea is to buy in, then convince the other share holders to liquidate the fund. This allows you to take the discount as a profit.
A few of the biggest losers were: Alpine Global (AWP), DNP Select (DNP), and Dreman/Claymore (DCS). I'm afraid I don't completely understand NAVs and don't know if they were purchased at a premium but, in the last year these funds and some others have dropped like nothing I have ever seen.
-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.
AWP is an international real estate fund, not the sort of fund to have during a mortgage and financial crisis. It is also at a 12% discount to its NAV (6.13 vs 7.01).
DNP is a fixed income fund, again not the sort of fund to have during a mortgage and financial crisis. You are lucky with this one as it is at a 24% premium to its NAV (9.41 vs 7.60).
DCS is a leveraged fund that invests in dividend paying stocks and as of August 31, 2008 had 42% of assets in the financial sector. Sorry, but this is exactly one of worst funds to have during a mortgage and financial crisis. It is also at a 21% discount to its NAV (4.81 vs 6.06).
Your open end funds must have different investment objectives than these 3 closed end funds.
A good site for information on closed end funds is the Closed-End Fund Association at
formatting link
-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.
Caution - what follows may be way more detail than you were looking for regarding NAVs and closed-end funds, in particular regarding discounts/premiums and leverage:
The Fund has a portfolio. Suppose you have Fund XYZ and the fund portfolio contains 10 million dollars worth of various stocks. And suppose that there are 1 million shares of the fund outstanding. Each share of the fund represents ownership of $10 worth of assets. That's the NAV.
Now here's the thing: Closed end funds issue a fixed number of shares. Say, in the example above, that 1 million shares. Once they've been issues, people no longer buy and sell those shares from or to the fund itself. Instead, those shares now trade on the exchanges like any other stock, and subject to supply and demand. So even though each share may represent ownership of $10 worth of a portfolio, when you buy or sell that share to someone else, he may not want to offer you $10 for it. Suppose he only offers you $9.50 for it. That's called a "discount". And when you look up that fund in the stock listings or in the newspaper or whatever, you'll see a share price of $9.50, even though you know that theoretically it's worth more than that. These discounts (and sometimes premiums - sometimes folks pay *more* than a share is theoretically worth!) sometimes magnify the price movements of one's investment.
The other thing about closed end funds which is more common than for open-ended funds or indices - is that closed-end funds often employ leverage - they borrow money and use that borrowed money to magnify the move in value of the underlying portfolio! Again, to the example above, there may be $10 million worth of portfolio and 1 million shares outstanding, but it's possible that that $10 million portfolio consists of, say, $12 million worth of stock and $2 million worth of borrowing. If the $12 million worth of stock goes up by 10%, the value of the overall portfolio goes up by more. If the $12 million worth of stock goes down by 10%, the loss is also magnified (ie. the portfolio goes to $10.8 million of stock minus the existing $2 million loans leaving $8.8 million in the portfolio - a loss of 12%, rather than 10%, even though the *stocks* only went down by 10%).
The above is all general, by the way. Specific funds may invest in more particular things - the ones you have apparently own real estate, for example, and one of them had lots of stock in the financial sector, rather than more evenly representing the market as a whole. Both of those will have taken very hard hits.
I'm a little concerned that someone has put an investor who doesn't know what a NAV is into closed end funds. Whoever sold these things to you failed to educate you adequately or to make sure you understood what you owned. There may be little you can do about the past, but I'd strongly suggest looking for someone who can better serve you by either helping more to educate you or by keeping you in simpler investments which you understand better. I hope these funds only represent a small portion of a larger and better diversified portfolio!
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.