Radley wrote
- quote -

To add to the other posts...your result when buying a closed-end fund
(CEF) instead of a regular open-ended one is that you add another
unknown to your investment: what will the premium or discount be when
you go to sell your mutual fund shares?

With an open-end mutual fund, if the fund holds $10 per share in
bonds, you'll get $10 per share back when you cash out, just by the
rules of how they work (minus any sales charges of course). With a
closed end you might get $9.30 or $10.10 or who knows what...the
shares are traded on the market and the price is dictated by current
supply/demand for shares. When you look up CEFs you'll see the current
premium or discount listed next to the current share price, expressed
as a percentage of the fund's NAV (NAV = net asset value - the share
price based on the value of the fund's investments).

You're probably saying, "why would anyone pay over NAV for a CEF?"
That's one of the mysteries out there. There's really no good reason
to, except in a few unusual circumstances. It's been studied a bit but
I think the best explanation is "people don't know any better."

My view: why bother with that additional, unpredictable risk?

Another issue with CEFs, specifically bond CEFs, is that a lot of them
use leverage - they borrow money at short-term rates and invest it in
long-term bonds to earn additional returns. How they do so is a little
complicated but you're likely to see higher returns during periods
that interest rates fall, and bigger losses during periods that
interest rates rise. So you might see a CEF with really exceptional
returns over the past couple of years, but that just means it'll have
really exceptional losses if interest rates rise. Which they will, at
some point. Again, it's another risk factor for funds of this type -
check to see if the one you're considering is using leverage.

One last caveat: given all of the above I can't imagine why people buy
CEFs at original issue. There's a good chance you'll overpay, and be
able to purchase it at less than NAV before long. Someone studied new
CEF issues and they seem to be a decent bubble indicator. The most new
issues come out in a given category (bonds, Japanese stocks, whatever)
AFTER the sector has rallied.

-Tad

daft[at]hotmail.com (jt) writes:

- quote -

No, it doesn't. Closed-end funds trade their
portfolio as much as open-end funds do.

- quote -

But they don't.

A bond Unit Investment Trust (UIT) would -- they
buy an initial portfolio and generally never again
make any changes, but UITs often have annoyingly
high expense ratios. But it wouldn't hurt to
at least investigate them.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

I wonder if the closed end aspect alleviates the classic
problem of bond funds in rising interest rate environments
where the turnover forces you to realize lower bond prices.
A typical alternative is to run your own bond ladder to
maturity dates, but that is soooo inconvenient.

A closed end fund could perhaps keep bonds to maturity -
would it's investment value tend to behave inbetween
an open end fund and a bond ladder? It seems silly that
everyone has to maintain the mechanics of their own bond
ladder instead of a product that includes management.

http://www.etfconnect.com/select/cef/fixed_income.asp

"Radley" <radleyramirez[at]hotmail.com> writes:

- quote -

An open-end mutual fund (whatever its investment style) is
a mutual fund that does not have a fixed number of shares -- it
creates them and destroys them at will, based on the
purchase and redemptions that investors make. When you
buy shares of a fund, the fund creates them and sells them
to you. When you redeem shares, the fund buys them from
you and then destroys them. As a result, the share price
is always the fund's net asset value (NAV) [aside from
any front-end or back-end load].

A closed-end mutual fund is basically a publically-traded
company that happens to be a mutual fund. It has a fixed number
of shares, and you buy and sell shares from/to other fund
shareholders in the public stock markets. The fund isn't
involved with the share transactions, other than to keep
track of how many shares each owner owns. As a result,
the share price is generally different (sometimes quite
drastically) from the fund's NAV.

There are other consequences of these differences -- for
example, a closed-end fund manager never has to worry
about having to invest huge inflows of cash if his fund
gets popular, nor does he have to worry about having to
sell securities to meet redemptions if investors decide
to bail.

So a closed-end bond fund is a bond mutual fund
that happens to be closed-end.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Hello,

This is a totally newbie question. Could someone please explain what a
Closed-End Bond Fund is? How is this a good place ato put money in regarding
longterm investments? Thanks.

Radley