One hot topic in the closed-end fund world the past few years has been buying funds on the IPO. This is the primary way in which a new CEF is born. About a year ago, Morningstar did a study with the premise that CEF IPO investors didn't lose money if they held onto the fund for a long time. The article was done in two parts and you can read them here: Part One and Part Two. While I would agree that they make some good points, a few questions lingered.

1. How did investors do if they had delayed their entry into the fund post IPO?
2. Are there certain time periods in which the CEF structure tends to do better than a peer ETF? This is also an attempt to take the market movements out of the results and focus on the structural differences in owning a CEF

Closed-end bond funds continue to gain a lot of attention as investors search for yield in a very low interest rate environment. At Closed-End Fund Advisors, we do our best to educate investors on how to avoid some of the big closed-end fund mistakes and this article is an effort to continue that endeavor.

We also are replying to Steven Pikelny's article last week on the Morningstar "CEF Weekly" comparing Undistributed Net Investment Income (UNII) to body fat - essentially saying that: UNII balances for CEF bond funds are a tax liability, UNII is irrelevant for municipal funds and that the UNII trend "is a functionally useless metric, and muddles the overall point." I have to whole heartily disagree with this statement. We suggest you read his article in order for ours to make sense.

Current Discount Levels and Tends

Discount and premiums exist at varying levels for individual

On December 3, 2012 I wrote an article covering Municipal Bond CEF's dividend risk that caused quite a few folks to call our firm, moreso than any article or interview we have done in my 12 years in the investment business. You can read the full article here. I thought it would be helpful, two months later, to search for "above average" muni CEFs.

At CEF Advisors we collect our own data "CEFA's Closed-End Fund Universe" for all U.S. listed CEFs for tracking the industry and making our internal investment decisions. The data used for this article is as of our February 8th, published Monday February 11th to our data clients.

I screened for a Municipal CEF that was simply "better than average" using the following criteria:

1. Classified as National Muni (104 peer funds) or State Specific Muni (115 peer-funds) CEFs.
2. Not classified as

At CEFA, we consider three important details when doing a primary review of a closed-end fund (CEF), whether it is currently in one of our client portfolios or being considered as part of a portfolio in the future. We track almost 70 data points per week per U.S.-listed CEF with "CEFA's Closed-End Fund Universe Report" (CEFU). The key areas we suggest investors or investment professionals monitor are the following: Entry Point Risk, Dividend Risk and NAV Performance.

1. Entry Point Risk - The NAV vs. Market Price for a CEF

We find it is important to not only understand the current discount or premium (disc/prm) on an absolute basis (amount + or - from zero), but also compare the disc/prm to itself historically and to its peers. CEFA uses a 90 day relative discount or the current disc/prm vs. the previous 90 day average disc/prm. We also compare funds on

On Tuesday, January 8, 2013, Closed-End Fund Advisors held its review for the previous quarter as well as its outlook for closed-end funds in 2013. The session was recorded and has been archived on our website and blog for replay. The slides are also available for download (in PDF format).

During the quarter, we lost 10 closed-end funds on a net basis. We ended the quarter with 219 equity CEFs and 377 bond CEFs. Discounts widened during the quarter to an average of -3.18% on December 28, 2012. We tracked this trend as it developed in our Universe data service. The key issue for the quarter included:

• Bond fund and Specialty Equity fund discounts widening to levels last seen in mid-2012

• Significant dividend cuts in many sectors, especially the Muni Bond grouping

• UNII Trend continued down for Municipal funds but Taxable Bond funds saw an increasing trend.

From our experience, if you are interested in closed-end funds then you typically fall into two groups of investors: Dividend Seekers or Contrarian Investors.

I wanted to focus this article on contrarian investing, or where one can currently find value amongst the roughly 219 available equity closed end funds. For those not familiar with some of the data we collect and use, please review CEFA's CEF Data Definitions. Data used in this article is from our weekly CEF data service, "CEFA's Closed-End Fund Universe" dated December 28, 2012.

Research Criteria: 1) Less than 15% of assets invested in U.S. stocks. 2) Current discount to NAV of more than -10%. 3) Relative discount wider than -1.5% (90 day average discount) 4) Comparable discount (vs. peer group average wider than -2%. 5) 1-year Z-stat of less than -1.0. 6) Relative Z-stat of less than -0.5. 7) 1-Year discount

As a follow-up to our article last week on municipal bond dividend increases and decreases we want to put the large number of recent municipal dividend cuts into perspective.

Click to enlarge images

Of the 103 National Municipal Bond Funds 39 or 38% have reduced their distribution yield since September 1st, 23 of these have occurred since December 3rd. This compares to the 40 dividend cuts across the other 497 funds in all other categories (380 if you remove the state specific municipal funds). This equals either 8% or 10.5% of the total number of funds for comparison.

As you can see in the table below, the average municipal bond fund cut has been -6%. To put this in real dollar terms, the average yield for a national municipal bond funds is 5.4% (as of Dec 7, 2012). If an investor had $500,000 invested in the average municipal bond fund

The largest major grouping in the closed-end fund (CEF) universe is the municipal or tax-free bond investment objective. The group has 220 of the total 600 U.S. listed funds (36.7%) or $89.4 billion of the total $261.3 billion (34.2%) assets held by all closed-end funds. There are 103 national muni funds and 117 state specific muni funds for investors to choose. All data unless otherwise noted is from our weekly CEF Universe data service dated November 30, 2012.

While discounts in the municipal sector have been hard to come by recently, we feel the benefits of closed-end funds, the fixed capital for the investment portfolio and the use of cheap leverage, currently make municipal CEFs more attractive for many investors than the open-end, exchange-traded and individual bond holdings options in terms of both dividend yield and total return performance.

It should be noted that due to the effects of both

While Business Development Company (BDC) Closed-End Management Companies are the half sibling of their traditional closed-end fund (CEF) counterparts, we believe they, and as an example Keating Capital (KIPO)'s concept and potential diversification benefits, offer a nice balance to the more traditional income focused closed-end fund portfolio.

However, it is important to note that this interview does not constitute a recommendation to purchase or sell shares in Keating Capital, and investors should do their own due diligence before deciding to invest.

Portfolio Manager & Investment Advisor

Timothy J. Keating is the President of Keating Investments, LLC, an SEC registered investment adviser, founded in 1997. Mr. Keating is also the Chairman and CEO of Keating Capital, a publicly traded business development company.

Prior to founding Keating Investments, Mr. Keating was a proprietary arbitrage trader and head of the European Equity Trading Department at Bear Stearns Intl Ltd. (London) from 1994 to