Buying at a steep discount is no guarantee of profits. The Boulder Total Return fund sold for a 15.6% discount five years ago, and has since plunged 39%. Nevertheless, the universe of deeply discounted closed-end funds is a good place to start hunting for bargains. The Latin America Discovery fund, which sold for a 16.7% discount five years ago, has soared 123%.
Cecilia Gondor, editor of The Investor's Guide to Closed-End Funds, says that closed-end fund discounts are still huge, compared with their historical averages. The average discount is about 4%; it's 8% now. She favors closed-end municipal bond funds, which currently sport average tax-free yields of 6.4%.
Many closed-end muni funds use borrowed money to augment their yields, and that increases risks, too. Be sure to check that before you buy.
For the daring, closed-end real estate funds might be a good place to start. The Cohen & Steers management team is one of the best in its field. For technology buffs, Gabelli Global Multimedia Trust GGT is selling at a 25.4% discount.
You can find a great deal of information on closed-end funds, including premiums and discounts, at www.closed-endfunds.com, as well as www.morningstar.com. Choose your picks carefully. If you buy a closed-end fund at a discount, you may not have time on your side. But you will have price — and that's a big advantage.
John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. new book,Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments, is available through John Wiley & Sons. Click here for an index of Investing columns. His e-mail is firstname.lastname@example.org. Twitter: www.twitter.com/johnwaggoner.