Closed-End Funds May Be Asia Bargains


It's getting uglier by the day in East Asian stock markets that not long ago were the belles of the global market ball.

But that could mean a great buying opportunity is developing for investors who want to bet that the region's 2-year-old economic crisis is over and that the next few years will bring renewed growth.

One attractive way to buy into foreign markets is via closed-end mutual funds that own shares in specific markets or regions. With closed-end funds, you often can buy stock at a discount to its true market value.

Those discounts have widened recently as Asian markets have tumbled from their highs.

South Korea's main stock index fell 3.5% on Monday and is down 17% from its recent high. Singapore's market sank 2.5% on Monday and is down 14% from its recent high.

Profit-taking is hammering these markets after stunning gains in the first half of the year. The South Korean market, for example, soared 57% in local currency terms in the first half. Hong Kong stocks were up 35%.

The markets were pumped up by growing belief that the region's economies had hit bottom after two years of severe contraction and deep currency devaluations.

But the current optimism about an economic turnaround also is having a negative effect on stocks. Interest rates have been rising in countries such as South Korea as growth improves. And in Japan, faith in the recovery there is pushing the yen's value higher--bad for Japanese exporters.

What's more, debt problems at Korean industrial giant Daewoo have served to remind investors that many of the region's companies still are struggling to regain their footing.

Another problem may loom for Asian markets and all emerging markets: concern that capital will exit between now and year-end, on concerns about the year 2000 computer bug.

Still, if recovery in the region goes on--and if foreign financial systems aren't seriously compromised by the Y2K bug--the cheaper these markets get, the more attractive they should be to long-term investors, analysts say.

There are plenty of ways to buy into an Asian recovery, but closed-end funds may be among the most appealing--especially as the stocks' discounts to true value widens.

Whereas an open-ended mutual fund's stock always reflects the value of the assets in the fund, a closed-end fund's stock won't necessarily do so.

That's because closed-end funds have only a limited number of shares that trade, usually on a major exchange such as the New York Stock Exchange.

The share price depends on whatever investors feel like paying at the moment. That can be more, or less, than the value of the fund's portfolio of stocks.

In the case of the Korea Fund, for example, its portfolio was worth $16.12 a share late last week, the fund estimated. But the stock of the fund, traded on the NYSE, closed at $13.13 on Monday--a 19% discount to the fund's asset value.

Some investors dislike closed-end funds because it seems as if many of them perennially sell at a discount to their true values. That is true for some funds, analysts concede--although premiums also occur. Stock of the Thai Fund, for example, now is priced at a stunning 81% premium to the asset value.

Paul Mazzilli, closed-end fund analyst at Morgan Stanley Dean Witter, says it still makes sense for value hunters to look closely at closed-end funds as their discounts to asset value widen. If a fund sells at a 20% discount, you're paying 80 cents for assets valued at $1. (Conversely, most analysts advise against buying funds at premiums.)

Mazzilli's favorites include India Fund and Singapore Fund.

Investors who don't want to focus on funds that own stocks in single countries can shop among funds that buy shares across the Asian region, such as the Asia Pacific Fund or the Scudder New Asia Fund. Shares of both have doubled since last fall.

A good source on the Internet for closed-end fund information:


Closed-End Funds: Some Asian Ideas

Closed-end stock funds can be a cheaper way to buy into a market sector when the market price of the shares is less than the fund's net asset value, or NAV--the market value of the stocks the fund owns. Most Asia-region closed-end funds now are selling at sharp discounts to their NAVs. A sampling:


Monday Stock Ticker Latest stock premium Fund symbol NAV close or discount Asia Pacific APB $12.18* $8.75 -28% India IFN 14.90 10.88 -27 Templeton Dragon TDF 12.17 9.31 -24 Greater China GCH 10.60 8.13 -23 M.S. Asia Pacific APF 11.79 9.38 -20 Scudder New Asia SAF 17.10 13.63 -20 Korea KF 16.12 13.13 -19 Singapore SGF 10.36 8.75 -16 Taiwan TWN 20.06 17.00 -15 R.O.C. Taiwan ROC 8.54 7.25 -15 Japan Equity JEQ 8.14 9.06 +11 Thai TTF 5.12 9.25 +81


* As of July 16; all others as of end of last week Note: All shares trade on New York Stock Exchange.

Sources: Reuters, Closed-End Fund Assn.

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