Insights: Investing

Mario J. Gabelli
From the Print Edition:
Don Johnson, Mar/Apr 02

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The closed-end fund structure offers advantages to fixed-income and equities investors. Closed-end bond funds generally use leverage (borrowing at money market rates and investing in longer-maturity, higher-yielding debt), which can produce higher yields than their> normally unleveraged open-end brethren. Consequently, market pricing of closed-end bond funds has been particularly strong.

The narrowing of the discount for closed-end equity funds may reflect investor recognition of the benefits of a fixed capitalization in volatile markets. Speaking for portfolio managers everywhere, I can assure you that money pours in at or near market tops and drains out at or near market bottoms. This penalizes open-end fund managers, who unless they maintain sizable cash positions in their portfolios at all times (always a political dilemma and a performance restraint in rising markets), are often forced to sell when they'd like to be buying and obliged to buy when they'd prefer to be selling. All other things being equal -- most notably the ability to attract assets and earn fees -- if asked whether it would be preferable to manage a closed-end or open-end fund, every portfolio manager I know would opt for the former.

The more democratic nature and the daily "marked to market" NAV pricing of open-end funds will very likely continue to appeal to the majority of investors. However, those willing to tolerate the vagaries of market-driven pricing for closed-end funds should enjoy the long-term benefits of the funds' structure, giving fixed-income managers the ability to enhance yield and equity managers more flexibility to buy cheap and sell dear.

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