Some Closed-End Portfolios Look Attractive
With the stock market hovering near all-time highs, wouldn’t it be great if you could add to your portfolio by purchasing shares at a discount?
You can, if you expand your vision to include closed-end mutual funds.
These oft-overlooked siblings of regular mutual funds feature professional management and diversified holdings. But unlike the former, they issue only a fixed number of shares, and those shares trade in the stock market.
That makes the funds vulnerable to the whims of investors, and their prices often fall to discounts compared to what their underlying stock or bond holdings are worth.
At the moment, several well-managed closed-end stock funds are selling for between 85 and 95 cents for every $1 of assets.
Especially noteworthy are five seasoned closed-end portfolios that got their starts well before today’s most prominent mutual funds were even in diapers. All five debuted during the 1920s, which means they survived the crash of 1929 and the ensuing Great Depression, as well as three major wars, Watergate, a couple of oil price shocks and O.J. Simpson.
With a focus on large or medium-sized U.S. stocks, the five funds don’t fluctuate as much as some of the wilder closed-end portfolios available, especially those that focus on emerging foreign markets.
“There aren’t that many strait-laced closed-end funds, but I think that’s where the better values lie,” said Albert J. Fredman, a finance professor at Cal State Fullerton and co-author of two investment books, including one on closed-end funds.
“These five all have built really good records over many years,” he said.
Peter von Raits, a portfolio manager at Closed-End Fund Advisors in Santa Barbara, says he’s comfortable owning any of the five.
“They’re the most followed, traditional and solid (closed-end funds), and they work very satisfactorily as core holdings,” he said.
Here’s a thumbnail sketch of each:
* Adams Express. This fund seeks capital preservation by holding more than 100 defensive stocks. Its “brand of cautious, low-risk investing almost guarantees consistently modest returns,” reads a recent analysis by Morningstar Inc. in Chicago. Adams Express calls Baltimore home, in contrast to the other four funds, all based in New York.
* Central Securities. Closed-end funds with the best performance often sell at the narrowest discounts, and this describes Central Securities. The portfolio has been trading at a markdown of only about 5% lately, compared to 10% to 15% or so for the other four.
Central Securities happens to be the least diversified of the five, concentrating in about three dozen stocks. Manager Wilmot Kidd has been at the fund’s helm for 22 years, the longest tenure of the group.
* General American Investors. This fund has had the weakest performance of the five over the last three years. It has been hamstrung by an above-average stake in health care stocks, writes Value Line analyst Norman Tepper.
It’s the only one of the five to pursue a pure growth strategy. Consequently, its dividend yield of 0.3% is smaller than those of the others, which pay between about 1% and 3%. In addition, General American’s annual expenses of about 1.1% are the highest of the five. (Adams Express has the lowest costs at 0.3% annually.)
* Salomon Bros. Fund. This portfolio uses two managers to spur competition, though both own many of the same stocks. “Rather than building independent portfolios as initially intended, the managers’ investment decisions are made cooperatively,” Morningstar says. Salomon Bros. Fund was known as the Lehman Corp. before a 1990 acquisition.
* Tri-Continental. With $2 billion, this is one of the largest closed-end portfolios around. Tony Maltese, a senior analyst at Smith Barney in New York, follows both Tri-Continental and the Salomon Bros. Fund, and he considers both to be moderate-risk investments whose shares are worth accumulating. J&W; Seligman, a well-known manager of regular mutual funds, runs this portfolio.
As noted, the appeal of these funds is the opportunity to buy into a diversified stock portfolio on the cheap.
“It’s a better deal than buying a mutual fund because you can buy at a discount,” said Maltese.
Unlike regular mutual funds, some of which can be purchased directly from the fund company, you will need to use a full-service or discount broker to buy closed-end products. With the exception of Central Securities, all of the above funds offer dividend reinvestment plans, which allow you to channel dividends and capital gains payments into new shares at little or no cost.
Four of the five funds noted above trade on the New York Stock Exchange. Again, the exception is Central Securities, which is traded on the American.
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The Quantitative Numeric Fund of Lincoln, Mass., plans to shut its door to new investors on March 31. The fund ((800) 331-1244; no load) was in the top 20% of small-company portfolios in each of the last two years. It is managed by John Bogle Jr.
