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Would someone explain the difference between closed-end funds and
straight ahead mutual funds to me? My closed-end funds took an enormous
hit while my managed (not index) mutual funds only took hits that seem
to be commensurate to the times we're in. Thanks in advance.
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"Michael" <g...@v...net> wrote in message
news:2008100410072516807-genef@verizonnet...
> Would someone explain the difference between closed-end funds and straight
> ahead mutual funds to me? My closed-end funds took an enormous hit while
> my managed (not index) mutual funds only took hits that seem to be
> commensurate to the times we're in. Thanks in advance.
>
Did your closed end funds go to a big discount to Net Asset Value (NAV)?
Open end funds are always priced at NAV while closed end funds can be at
significant premiums or discounts to NAV. Worst case is to to pay a premium
for a closed end fund and then see it go to a discount in a down market.
Without telling us which closed end and open end funds you have we can only
guess at why they performed differently.
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In article <2008100410072516807-genef@verizonnet>,
Michael <g...@v...net> wrote:
> Would someone explain the difference between closed-end funds and
> straight ahead mutual funds to me? My closed-end funds took an enormous
> hit while my managed (not index) mutual funds only took hits that seem
> to be commensurate to the times we're in. Thanks in advance.
Closed end and open end funds are both types of mutual funds.
In an open end fund, when someone buys a share, a new share is
created, you get ownership of that share, and the net asset value
is set based on your fraction of the total value of the fund.
A closed end fund starts with a fixed basket of stocks and bonds,
then establishes a fixed number of share. There is an IPO, much
like a new company going public. The shares are sold, and they
trade on the market like stocks.
Key behaviors of closed end funds are that they often sell for
a premium at IPO, but later sell at a discount because they are
thinly traded. Also due to being thinly traded, they are harder
to get rid of, so they often drop more in value than their NAV.
They also tend to not be actively managed, so if they get a dog
stock in the mix, they can ride it down to zero.
The attraction to closed end funds is that they often sell for
a discount compared to NAV. The idea is to buy in, then
convince the other share holders to liquidate the fund. This
allows you to take the discount as a profit.
-john-
--
====================================================
==================
John A. Weeks III 612-720-2854 j...@j...com
Newave Communications http://www.johnweeks.com
====================================================
==================
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> Without telling us which closed end and open end funds you have we can only
> guess at why they performed differently.
A few of the biggest losers were: Alpine Global (AWP), DNP Select
(DNP), and Dreman/Claymore (DCS). I'm afraid I don't completely
understand NAVs and don't know if they were purchased at a premium but,
in the last year these funds and some others have dropped like nothing
I have ever seen.
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"Michael" <g...@v...net> wrote in message
news:2008100508220416807-genef@verizonnet...
>> Without telling us which closed end and open end funds you have we can
>> only
>> guess at why they performed differently.
>
> A few of the biggest losers were: Alpine Global (AWP), DNP Select (DNP),
> and Dreman/Claymore (DCS). I'm afraid I don't completely understand NAVs
> and don't know if they were purchased at a premium but, in the last year
> these funds and some others have dropped like nothing I have ever seen.
AWP is an international real estate fund, not the sort of fund to have
during a mortgage and financial crisis. It is also at a 12% discount to its
NAV (6.13 vs 7.01).
DNP is a fixed income fund, again not the sort of fund to have during a
mortgage and financial crisis. You are lucky with this one as it is at a 24%
premium to its NAV (9.41 vs 7.60).
DCS is a leveraged fund that invests in dividend paying stocks and as of
August 31, 2008 had 42% of assets in the financial sector. Sorry, but this
is exactly one of worst funds to have during a mortgage and financial
crisis. It is also at a 21% discount to its NAV (4.81 vs 6.06).
Your open end funds must have different investment objectives than these 3
closed end funds.
A good site for information on closed end funds is the Closed-End Fund
Association at www.cefa.com.
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Michael <g...@v...net> writes:
> I'm afraid I don't completely
> understand NAVs and don't know if they were purchased at a premium
NAV means "Net Asset Value".
Caution - what follows may be way more detail than you
were looking for regarding NAVs and closed-end funds,
in particular regarding discounts/premiums and leverage:
The Fund has a portfolio. Suppose you have Fund XYZ and
the fund portfolio contains 10 million dollars worth of
various stocks. And suppose that there are 1 million
shares of the fund outstanding. Each share of the fund
represents ownership of $10 worth of assets. That's the NAV.
Now here's the thing: Closed end funds issue a fixed
number of shares. Say, in the example above, that 1 million
shares. Once they've been issues, people no longer buy
and sell those shares from or to the fund itself. Instead,
those shares now trade on the exchanges like any other
stock, and subject to supply and demand. So even though
each share may represent ownership of $10 worth of a
portfolio, when you buy or sell that share to someone
else, he may not want to offer you $10 for it. Suppose
he only offers you $9.50 for it. That's called a "discount".
And when you look up that fund in the stock listings
or in the newspaper or whatever, you'll see a share
price of $9.50, even though you know that theoretically
it's worth more than that. These discounts (and sometimes
premiums - sometimes folks pay *more* than a share is
theoretically worth!) sometimes magnify the price movements
of one's investment.
The other thing about closed end funds which is more
common than for open-ended funds or indices - is that
closed-end funds often employ leverage - they borrow
money and use that borrowed money to magnify the move
in value of the underlying portfolio! Again, to the
example above, there may be $10 million worth of
portfolio and 1 million shares outstanding, but it's
possible that that $10 million portfolio consists of,
say, $12 million worth of stock and $2 million worth
of borrowing. If the $12 million worth of stock goes
up by 10%, the value of the overall portfolio goes
up by more. If the $12 million worth of stock goes
down by 10%, the loss is also magnified (ie. the
portfolio goes to $10.8 million of stock minus the
existing $2 million loans leaving $8.8 million in
the portfolio - a loss of 12%, rather than 10%,
even though the *stocks* only went down by 10%).
The above is all general, by the way. Specific
funds may invest in more particular things - the
ones you have apparently own real estate, for
example, and one of them had lots of stock in the
financial sector, rather than more evenly representing
the market as a whole. Both of those will have taken
very hard hits.
I'm a little concerned that someone has put an investor
who doesn't know what a NAV is into closed end funds.
Whoever sold these things to you failed to educate you
adequately or to make sure you understood what you owned.
There may be little you can do about the past, but I'd
strongly suggest looking for someone who can better
serve you by either helping more to educate you or by
keeping you in simpler investments which you understand
better. I hope these funds only represent a small portion
of a larger and better diversified portfolio!
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
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