Fear and greed abound in today’s markets. The sharp decline in U.S. economic growth is spurring worries about a double-dip recession, and many investors are hunkering down. However, there is a bright spot: skittish times mean skittish asset prices, and that’s where the opportunity now lies in closed-end funds.
Closed-end funds, like open-end mutual funds, are registered investment companies. The key difference is that closed-end funds issue a fixed number of shares that trade in the secondary market, just like the shares of any publicly traded company. Similar to stocks, whose share prices are based on supply and demand, shares of closed-end funds can sell at a premium or discount to their net asset value (NAV), or the liquidation value of the securities they hold. Indeed, closed-end funds are among the only publicly traded investments in which we know what they are worth (NAV) and what the market is willing to pay for them (trading price).
Today, there are more than 600 closed-end funds trading on U.S. stock exchanges, and the pipeline is once again growing after falling off in the financial crisis. In 2007, there were 40 initial public offerings (IPOs) for closed-end funds totaling over $27 billion in new assets raised. In 2008 the number fell to just two, totaling $262 million in new assets. Since then, we’ve seen 24 closed-end fund IPOs raising more than $7.6 billion in assets through July 2010.