If you are familiar with mutual funds and want to explore a related investment, you should consider closed end funds. Closed end funds (CEFs) are similar to mutual funds, but they also present some unique features. First, they offer a limited number of shares, which makes them “closed” as opposed to the continuous offering of new shares in a traditional mutual fund.
Second, closed end funds also trade continuously throughout the trading day, so investors can use different types of buy and sell orders to enter or exit the market. Since they are sold continuously, CEF prices are determined by market demand, so there is a bid-ask spread as there would be when trading stocks.
As a result, a CEF’s bid-ask is related to, but not determined by, its net asset value (NAV). This gives closed end funds a unique characteristic: they can trade at a discount to the fund’s NAV. When this happens, investors have the opportunity to buy the fund at a discount.
Closed end funds also offer investors numerous ways to generate capital growth income through portfolio performance, dividends and distributions. The funds make income distributions at specific times. Like mutual funds, closed end funds have specific investment objectives, which include capital appreciation or generating current income.
According to Lipper, there are 655 CEFs in their database and they are categorized according to asset class (equity and fixed income) and by general domestic equity, global international, fixed income-taxable, fixed income-tax exempt and leveraged.
To get an idea of the appreciation potential in CEFs, the following sorts were conducted to find the funds which had the greatest NAV returns for one-, three- and five-year periods. Given the market conditions over this turbulent period, no single asset class consistently ranked at the top.
For the one-year period, the top sectors were the Pacific ex-Japan, real estate and options-related investing. For the three-year period, the top funds were in debt, sector income and specialized equity. For the five-year period the top performing sector was emerging markets.
In comparison, the one-year return of the S&P 500 Index was +14.9%, minus -17.6% for three years, and minus -4% for five years.
But the CEF NAV returns were impressive, averaging about +66% for the one-year period, +18% for the three-year period, and +23% for the five-year period.
Here are the specific fund rankings for one- three- and five-year periods based on NAV return data supplied by the Closed-End Fund Association (www.closed-endfunds.com)
Top-Rated Closed-End Funds by NAV Returns (1 Year)
| Fund | 1-Year NAV |
| Tortoise Energy Cap (TYY) | 72.20% |
| Cohen & Steers Quality Rlty. (ROI) | 64.45% |
| Aberdeen Indonesia (AI) | 65.29% |
| Thai Capital Fund (TTF) | 61.02% |
| Thai Fund (TTF) | 61.02% |
Top-Rated Closed-End Funds by NAV Returns (3 Years)
| Fund | 3-Year NAV |
| PIMCO Corporate Oppty. (PTY) | 19.62% |
| Central Fund of Canada (CEF) | 18.93% |
| Central GoldTrust (GTU) | 18.88% |
| PIMCO Corporate Income (PCN) | 18.30% |
| PIMCO Str. Glbl Gov. (RCS) | 16.38% |
Top-Rated Closed-End Funds by NAV Returns for 5-Years
| Fund | 5-Year NAV |
| Aberdeen Indonesia (IF) | 26.81% |
| Central Fund of Canada (CEF) | 24.67% |
| Malaysia Fund (MAY) | 22.07% |
| Aberdeen Latin America (LAQ) | 21.16% |
| Aberdeen Chile (CH) | 19.81% |
Source: Closed-End Fund Association, NAV data as of 11-2-2010. NAV (Net Asset Value): The dollar value of a single share based upon the value of the fund’s assets, less liabilities and divided by the number of shares outstanding. NAV may be more or less than the market price for the fund’s shares. NAVs and Market Prices are not adjusted for any distributions. When a fund goes “ex-dividend” NAVs and Market Prices will drop by the amount of the dividend, assuming no change in appreciation.
