Using closed-ended funds

Closed-ended funds have advantages and disadvantages.

Closed-ended fund investors can expect diversification and professional management (although some question the quality of this management, since many of these managers aren't in the limelight.)

There are management fees, usually 1 to 2%, extracted from portfolio returns.

Liquidity (relative lack of interest and trading activity) can be a double-edged sword:

• If you're selling, you may not get as good a price, but
• if you're buying, you'll likely get a discount.

It is not hard to see that these funds should be considered long-term investments.


Closed-ended funds can be used

• to build out a portfolio or
• add specific components like international exposure.

Patient value investors seek not only a good price (meaning a good discount), but also a fund with solid long-term potential.

Many pros use closed-ended funds, including Warren Buffett.

• In 1972, Source Capital was trading at nearly a 50% discount to NAV. Buffett purchased almost 20% of the outstanding shares.
• Though the price fluctuated in the interim, Buffett hung in for 5 years before selling for an estimated $15.7 million profit.