Unlike the current wave of Exchange Traded Funds, they are actively managed and do not represent a passive index investment. Managers have the ability to buy and sell as they chose. In addition, unlike a traditional Mutual fund, which share price is equal to its Net Asset Value, a closed-end funds price is a function of supply and demand. Therefore a fund can be trading at a sharp discount or premium to the underlying value of its holdings.
It is within this discount that we can find long-term bargains to fill our portfolios. CEFs come in a variety of flavors from emerging markets to highly leveraged junk bonds. Investors can find a fund to suit any investment need. I think a good place for investors to dabble in the world of CEFs is to take a look at a few of the Grandfather funds. These self-managed investment companies where created to do one thing: manage a pool of assets as a closed-end fund.
These stocks can serve as an addition to a core portfolio or as a main holding as they are filled with many blue chip and large cap stalwarts. Each was founded in the 1920s and has paid constant dividends for at least fifty years. These guys aren't for short term trading, but for "placing in a shoe-box and forgetting them for a while" style investment. Something you can purchase for the grandkids.
Tri-Continental (TY) was founded in 1925 by a junior clerk at J.W. Seligman. The original concept of the fund was to invest in companies on North and South America and those in Europe. Current holdings include Dow components Exxon-Mobil (XOM) and GE (GE) as well some growth holdings such as Marvell Technology Group (MRVL). The fund is leveraged through the issuance of preferred stock.
However, Tri-Continental is only leveraged a measly 1.56%, very small by closed-end fund standards. The fund has paid dividends constantly for 63 years and its current policy is to distribute quarterly 2.75% of the fund's net asset value. This equates to an impressive 11% yield on NAV or 12.60% on share price. Tri-Continental is currently trading at a 10.31% discount to its 2.2 billion in holdings.
The Adams Express Corporation (ADX) was founded in 1840 as a courier service specializing in the transport of securities and other related documents. By the end of the 1920s Adams become more of a holding company for various investments and converted into an investment manager and closed-end fund in 1929. The company has paid dividends ever year for 73 years and only paused for a brief time during the Great Depression.
In keeping with the long term nature of the fund, managers Joseph Truta and Douglas Ober have been at the helm for over 22 years. The internally manage structure keeps expenses low at 0.44% and the fund has returned 12.45% since inception based off share price. The 13.86% discount allows shareholders to purchase such companies Conoco-Phillips (COP), Sclumberger (SLB), PepsiCo (PEP), and Microsoft (MSFT) at closeout prices.
General American Investors' (GAM) primary objective is long term capital appreciation and growth and the fund has done just that, receiving numerous awards from Lipper. General has outperformed the other core closed-end funds, for ten year periods ending each year from 2003 till 2007. Earning in the process, an annual return based off share price of 15.77%, since its inception in 1927. The fund is leveraged via a preferred stock offering in 1998.
General American may offer the diverse group of holdings including Halliburton (HAL), Nintendo (NTDOY.PK) and Costco Wholesale (COST). The fund is currently trading at 9.78% discount to its NAV. Volume for GAM can be a little light as there are only 31 million shares available. Limit orders would be advised for purchase. The fund also pays dividends twice a year; however the amounts vary widely, with most of the bang coming from long term capital gains.
Most Investors over look closed-end funds for their portfolios, which is a real shame. Those of us with long term focus can really find some dollar store bargains if we take a look at the net asset values of the funds. The preceding funds offer investors a chance to try their hands at the world of CEFs while getting some quality holdings on the cheap. I would urge anybody with a long term focus to give GAM, TY and ADX some further due diligence in order to make a nice addition to their core portfolio.