Foreign closed-end funds give ready market access

Andrew Leckey

September 02, 1992|By Andrew Leckey

Unpredictable foreign countries and risky junk bonds, once considered the ugly ducklings of investments, have provided some beautiful returns in closed-end funds this year.

The Chile Fund, for example, is up a handsome 64 percent in total return, one of a number of strong performers that also include First Philippine Fund, up 56 percent.

Among high-yield bonds for the most aggressive of investors, the Prospect Street High Income Portfolio is up 46 percent and the New America High Income Fund has gained 34 percent.

Yet, just as volatile junk bond values can take turns for the worse, so can foreign markets. Just ask the investor who put money into the faltering Korea Fund, down 40 percent this year.

"Closed-end funds can be risky, primarily because the timing of entering and exiting a single country's market is left to the investor," explains Michael Porter, vice president of research in closed-end funds for Smith Barney, Harris Upham & Co.

"Nonetheless, emerging countries remain the fastest-growing part of the world economy; their stocks are attractively valued with historically strong returns and huge potential."

Closed-end funds differ from the open-end mutual funds more familiar to American investors, in that they're sold as shares on the New York and American stock exchanges, as well as over the counter. Unlike an open-end fund, which creates new shares to meet investor demand, closed-end funds start with a set number of shares.

"You should choose an investment if it offers something different, and closed-end funds certainly do in terms of making restricted markets such as China, Chile and Brazil readily available," says Stuart Greenberg, manager of mutual fund research for Merrill Lynch & Co. "And there's liquidity as well."

Because funds are fixed in their amount of capital, managers can structure portfolios exactly as they want without worrying about money coming into the fund or redemptions. As with any stock, closed-end fund shares may sell at a discount or premium to the overall market, depending on the investment community's perception of its prospects.

"The investor in a closed-end fund must assess the fund's portfolio and its net asset value, but must also analyze how the share price relates to it," says Thomas Herzfeld, who heads Thomas J. Herzfeld Advisors, a Miami-based investment management and research firm specializing in closed-end funds. Getting the discount wrong can have disastrous effect."

The Herzfeld Closed-End Average of 17 closed-end funds is up just 0.3 percent this year, while the Herzfeld Single-Country Average is up nearly 8 percent.

One reason some closed-end funds have risen this year and others haven't, apart from portfolio yield, is the public's positive perception of certain stocks. That means a greater premium.

Doing a balancing act between portfolio yield and stock price requires effort. You never want to overpay.

Greenberg, for example, doesn't like buying closed-end funds selling at premiums of more than 2 percent. Picking and choosing carefully is important.

Selling is easy. When you sell a closed-end fund's share, you simply pay the brokerage fee that you would with any stock, without the redemption restrictions or back-end fees of some open-end funds.

Among closed-end funds run by "star" managers, Royce Value Trust managed by Charles Royce has easily beaten the overall market by rising 12 percent this year.

The Gabelli Equity Fund of Mario Gabelli has posted an 8 percent gain. The Zweig Total Return Fund run by Marty Zweig is up 4.59 percent, while his Zweig Fund is up just 1 percent.

Current Greenberg recommendations in closed-end equity funds are Convertible Holdings Capital, Taiwan Fund, R.O.C. Taiwan Fund and Thai Capital Fund. Among taxable closed-end funds, he suggests Blackrock Investment Quality Trust and Hyperion 1999 Term Trust.

In municipals, he likes MuniYield Insured Fund and Blackrock Municipal Term Trust.

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