An Introduction to Closed-end Funds
A closed-end fund is similar to mutual funds in that it consists of a portfolio of securities. However these funds do have several big differences from average funds. The main difference is how closed-end funds are priced. While these funds will value their holdings each day, the price per share rarely accurately reflects the value of its assets. For instance, on Tuesday the Equus II Fund’ (EQS) assets were worth $11.28 a piece after being divided by its outstanding shares. That day the shares closed on the New York Stock Exchange being sold at a 20.5% discount. If it had sold its stocks and distributed its proceeds, then its shareholders would have reaped an instant 20.5% windfall. Of course, there are also some closed-end funds that trade for premiums, however most closed-end funds sell at a discount. Nobody knows why this happens though. It could possibly be because its share price reflects the market’s opinion of the fund’s managers or of the future value of the fund’s portfolio. Another reason for such a steep discount coulb be that the market realizes that while a lot of closed-end funds are launched, very few of them actually ever become open-ended funds.
