Using CLOSED END FUNDS for GROWTH and INCOME

If you’re looking for more income, this article could shed some light on the advantages of deeply discounted closed end funds and demonstrated advantages over no-load mutual funds, exchange traded funds (EFT), and loaded mutual funds for income investors. In my over 20 years of investing I’ve constantly seen people make the same mistake of paying too much for their investment. This article is designed to educate on a very unique investment style designed to achieve a greater probability for growth, higher current income, and lower overall risk.

First some basic facts about closed end funds

According to Lee, Shleifer and Thaler (1990) from 1980-1998 the average discount on most US closed end fund varied from 0-20% and averaged around 5%.

According to the Investment Company Institute, at the end of 2005 there were 634 closed-end funds with combined assets of about $276.35 billion. Many of the same managers of open end funds have loaded and no-load funds along with closed end funds and often have similar investments, risk, and returns.

The four main factors about closed ended fund from Lee, Shleiler and Thaler. Closed end funds are: 1. Issued at net asset value (NAV) or above 2. On average they trade at a relative discount 3. The discount or premium is subject to wide variations over time and across all funds and classes. 4. At termination, the price converges back to NAV

How to increase your income

I will use the Gabelli Dividend & Income Trust or symbol (GDV) as our example. It’s currently trades at a 15.71 % discount and has a 6.64% income from dividends. What this means is that for every $85 dollars invested you will have $100 that’s working for you. At the end of every day the markets calculates the value of the portfolios. For instance, your portfolio is worth 100,000 dollars you could sell it to your spouse or someone else for $85,000 that is what a 15% discount means. Now if that $100,000 portfolio was paying 5.65% or $5,650 dollars per year in income as dividends, then a person now bought it at $85,000 will still receive that same dollar amount or $5,650 income. But since the income from the portfolio is the same and the cost is about $15,000 dollars lower than the new current income is 6.64%. We would like to take you through three simple examples, since the Gabelli investing family has closed loaded and no load funds. I would make the same assumption on the next three examples that the manager had the same stocks in each structure.

#1 Closed end fund (a) You invest at a 15% discount and immediately start receiving almost a 6.64% current income. If you get lucky a buy out firm purchases the fund in the second year and turns it into a no load open-ended fund. The net asset value does not change. You still make 15% in principle and about 6.64% income per year; it works out to be 13.86 % per year over two years assuming no market change. (b) If there is no buyout and the selling price and NAV did not change at all, you make 5.65% per year over two years #2 No-load mutual fund & ETF You invest in a no load fund trading at NAV or ETF with no sales change and it has no change in net asset values in two years. At 5.40% per year in dividend and thus have a return of about 5.40% per year over two years. #3 Loaded mutual fund You invest in the Gabelli fund with a 5.75% load fund. With a 5.75% load you’re paying $105.75 dollars for every $100 that gets invested, it will take over a year in dividends in this case to break even in principle. Again if the asset value does not change in two years your income is about 5.3% based on the dividend at NAV and that would net you about a 2.6% total return per year over 2 years.

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