So Many Discounts And A Good Many Deals

Closed-end bargains abound in both equity and bond funds

Bargain-hunters find slim pickin's on Wall Street nowadays unless they stop at the closed-end fund counter. Nearly 90% of the funds, which look like mutual funds but are bought and sold like stocks, trade at prices that are actually below the net asset value of their holdings. In fact, 42% of the equity funds and 6% of the bond funds trade at discounts greater than 20%.

But buying cheap is dear in the end if the quality is poor, so investors still need to inspect what they're buying. To help you do that, we bring you the closed-end version of the BUSINESS WEEK Mutual Fund Scoreboard. The scoreboard reports on fund performance, both by net asset value (NAV) and by the gain or loss in market price of the shares. We also look at essentials such as investment category, asset size, expenses, and risk. We grade the funds from A to F based on their three-year NAV returns, adjusted for risk. Eight equity and 24 bond funds earned the top grade (table). We carry data for 120 equity funds and 70 bond funds in the magazine. At, you can find all those plus 284 more bond funds.

ROLLER COASTER. As with conventional mutual funds, high returns alone do not necessarily translate into a high BUSINESS WEEK rating. Look at the Turkish Investment Fund, which raced ahead of the pack last year, gaining 274.1% in NAV and 306.4% in share price. Those kinds of gains do not come without risk, and indeed, the history of the fund shows what a roller-coaster ride investors have had. In 1998, the fund lost about one-third of its value. All told, Turkish Investment earned a C, or average, for its risk-adjusted return.

No fund is attractive unless the outlook for the underlying investments are promising. On that account, closed-end fund analyst Paul J. Mazzilli of Morgan Stanley Dean Witter recommends the France Growth Fund. Corporate restructuring and earnings growth, Mazzilli says, should allow the French stock market to outperform the other European bourses in 2000. (France Growth also rates an A from BUSINESS WEEK.) The fund trades at a 16.5% discount from NAV. For the emerging markets, Mazzilli's favorite is the India Fund, with a huge 31.5% discount to NAV. "India has one of the world's fastest-growing economies," he says, and is a promising technology play.

But investors don't have to go abroad for good deals. Adams Express Co. and General American Investors, both with A's from BUSINESS WEEK, are recommended by Mazzilli as well. Both large-cap funds had strong performance last year and beat the Standard & Poor's 500-stock index over the last three--a feat few mutual or closed-end funds accomplished. Adams, in particular, sports rock-bottom expenses of just 0.22%, not a whole lot more than an S&P 500 index fund.

There are no closed-end Internet funds, but some other sectors offer good opportunities. H&Q Life Sciences Investors, which specializes in biotech stocks, gained 78% in market value last year and still trades at a discount of 18.8%. Hancock Bank & Thrift Opportunity Fund lost 13.9% in value last year as bank stocks stumbled. Should interest rates peak soon and bank mergers start anew, the fund, with a 12.2% discount, could be a shrewd play.

Perhaps the best bargains are in bond funds. Discounts are at levels not seen in at least five years, says Thomas J. Herzfeld of Miami-based Thomas J. Herzfeld Advisors. Herzfeld, the dean of closed-end investing, suggests the "20% solution"--a basket of bond funds selling at 20% discounts. "The discounts will be half of that in six months," he says. "Even if rates go up some more, the discount gives you a substantial cushion."

Bond-fund discounts are so large, says Herzfeld, that he expects that some fund managers will seek to fix that by converting the closed-end funds into mutual funds, thus wiping out the discount and allowing investors to get in and out at NAV. One such move under way is Independence Square Income Securities, which is to hold a shareholder vote on open-ending during the first quarter. "Management supports it, so it should have no trouble in passing," says Herzfeld. Still, the fund sells at a 10.8% discount to NAV.

Discounts on municipal bond funds have shrunk somewhat in January, but they are still large. That puts the current yields for many muni funds near 7%--worth nearly 11% for an investor in the 36% tax bracket. Jon Maier, PaineWebber Inc.'s closed-end fund analyst, suggests Nuveen Premium Income Municipal Fund, with a yield of 7.2%, Van Kampen Municipal Opportunity Trust, 7%, and Van Kampen Muni Income Trust, 7.44%, as attractive buys among the tax-free closed-ends. Ready to go bargain-hunting? The sale starts on page 92.