biomedlives

The Closed-End Fund Discount Quandary

I believe that, when a CEF pays dividends that are higher than its income, the year end tax statement identifies as a return of capital the amount that exceeds income.


On Mar 16 08:07 PM MattZN wrote:

> Closed-end funds are doing a lot more then just holding a basket
> of securities. Operating at a continuous discount is typically an
> indication that the fund is doing something wrong.
>
> For example, a fund which has a larger dividend then the dividends
> being received by the underlying securities might be padding returns
> with a portion of the original investment. The investor would wind
> up paying extra taxes on the artificially inflated dividend. The
> market value of such a fund winds up operating at a permanent discount
> to its underlying assets.
>
> Many factors are involved when it comes to closed-end mutual funds.
> Leverage-based risk, past performance, current activities, surprise,
> large fund inflows or outflows which effect performance, and so on
> and so forth. The investor has no ability to drill down and arbitrage
> the individual securities making up an actively managed fund.
>
> Thus, the market value of the fund can still be correct even when
> it differs from the market value of the securities making up the
> fund. Funds which trade at substantial discounts are a huge red
> flag for me. Of course, I don't invest in mutual funds any more
> at all, they have for the most part proven themselves unworthy of
> my attention so why would I want to pay the fund upwards of 1% plus
> other fees when I can just own the underlying stocks instead? Ok,
> bonds ARE a somewhat different animal, there are still good reasons
> to own bond funds. Even so, I find myself unwilling to give fund
> managers those fees these days.
>
> -Matt