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This article is from the A Guide to Closed-End Funds (CEFs).

Closed-End Funds: Will Discounts and Premiums Persist?

Investors of CEFs that trade at large discounts naturally would like the fund management to do something to reduce the discounts. Through the years, funds have tried several alternatives with mixed results. Many of the domestic funds have policies of paying handsome dividends to attract investors, and thereby reduce discounts. Some funds authorize their managers to buy back shares of the funds. Still others periodically offer investors the opportunity to bail out at NAV. Some of these actions have reduced the volatility of the discount/premium of these funds, and, in some cases, the discount.

However, as of this writing (December 16, 1994), a quick glance shows the vast majority of the funds trading at discounts of 10%, many a lot more.

Some funds are fortunate to trade at premiums, a few at hefty premiums. Except in the case where premiums are earned through outstanding performance, such premiums rarely last. At the worst, Wall Street folks, ever ready to make a quick buck, will offer ever more funds to the public until their demand is sated. This is especially true when the public sentiment is extremely bullish (in which case, the new offerings come out in droves) as was the case during the late 1993 - early 1994 emerging markets binge, or when limited supply for a market exists as was the case with the Korea fund, the India Growth fund and the Germany fund.

 

Continue to:

• prev: Premium/Discount of the Scudder New Asia Fund
• Index
• next: Investing in Closed-End Funds: The Basics: Introduction

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