Since late 1987, The Herzfeld Closed-End Fund Average has outperformed the Dow Jones Industrial Average by more than 30%. In the past year, the Herzfeld average is up around 8% while the DJIA is flat.
Closed-end funds, which trade like stocks, have advantages over mutual funds:
- They don’t have to hold cash to meet possible redemptions so they can be fully invested in stocks or bonds, which are likely to generate higher long-term returns than cash.
- Because they don’t have to handle cash inflows and outflows, closed-ends aren’t forced to buy at market tops, when cash flows in, or sell at market bottoms, when cash flows out.
- Closed-end funds (even those with excellent records) often trade at a discount to the value of their holdings. Thus, you might buy stocks for 90 cents on the dollar, through closed-end funds.
Before buying a closed-end fund, follow it for a while and buy it when its discount widens. For example, Central Securities (AMEX:CET), a five-star Morningstar fund with 10-year returns of nearly 24% per year, recently sold at a 10% discount.
