Closed-End Mutual Funds in Volatile Times

Spencer Davidson should be famous. The manager of General American Investors fund has delivered a 9.1% annualized return over the past decade, through Sept. 30, more than tripling the 3% of the Standard & Poor's 500-stock index while still investing primarily in blue-chip stocks. He has an enviable dossier: At 66, he has more than 40 years of investment experience and was a member of the legendary 1966 graduating class of Columbia University's MBA program, which produced well-known hedge and mutual fund managers Mario Gabelli, Art Samberg, and Leon Cooperman. So why haven't you heard of him? Because General American is a closed-end fund.

Often perceived as the older, unevolved cousin of modern mutual funds, closed-end funds launched in the U.S. in 1893 (the first mutual fund came in 1924). They are curious creatures. While the value of a mutual fund is simply the sum of its holdings at the end of the day—a direct reflection of the gain or loss in what it owns—the value of a closed-end fund isn't nearly as straightforward. It trades on an exchange like a stock, and its price can be buffeted around the same way, sometimes without any obvious catalyst. Unlike a mutual fund, which takes in new money, closed-end funds have an initial offering and often, that's that—new shares are rarely issued, and usually there's no set liquidation date for the fund. To buy in, you purchase shares on an exchange from another investor. The same goes for selling.