3 Closed-End Funds With The Best Fundamentals

By Aryeh Katz | May 10, 2010 AAA

Closed-end funds are the Rodney Dangerfield of the investment world. That is, they don't get a lot of respect. Sure, they're bought and sold in quantity, but the media spotlight rarely seems to fall on these seemingly arcane investment vehicles that never seem to trade for what their underlying investments are worth.

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And that's part of the trick in investing in them. Closed-end funds trade at a premium or discount to their net asset value (NAV) - which often affords savvy investors opportunities to buy them very low and sell them higher.

Below we list three closed end funds with superior fundamentals.

Trade Bonds For Profit
The Morgan Stanley Emerging Markets Domestic Debt Fund, Inc. (NYSE:EDD) is a very long name for an investment company that focuses on generating a high level of current income predominantly from investments in U.S. Treasuries. Year to date (YTD), the fund is up over 7.5%, and for the year, better than 33%. This compares stunningly against the return on mid-term U.S. treasury notes, as represented by the iShares Barclays 7-10 Year Treasury Bond ETF (NYSE:IEF), which returned only 3.15% YTD and lost 2% on the year. The difference is attributable both to the fact that EDD is an actively-managed portfolio (it trades its holdings, while the ETF is a passive tracker of bond prices).

The company's shares pay a lofty 8.15% dividend and trade with a multiple of just 3.08-times last year's earnings. Price to Book for the shares is 0.95.

City Slickers
Dreyfus Strategic Municipals, Inc. (NYSE:LEO) is another actively managed fund that trades mostly municipal obligations. Year to date, the fund has gained 5% and for the last 12 months the pickup was almost 22%. LEO has a P/E of 7.70 and a dividend yield of 6.93%. As expected, LEO's returns far outstrip those of the iShares S&P National Municipal Bond Fund ETF (NYSE:MUB) which tracks the S&P MuniBond Index and gained only 2.7% for the year. (Actively managed ETFs offer increased earnings - but are the cons worth the potential payoff? To learn more, read Actively Managed ETFs: The New Mutual Funds?)

The Dow 30 Enhanced Premium & Income Fund, Inc. (NYSE:DPO) relies on a number of strategies to generate gains, including using derivatives. The dividend yield on the shares is 10.02% and the P/E is 4.45. DPO trades at book value, with a P/B of 0.99.

The Bottom Line
Investing in closed-end funds offers greater potential than straight index investing, as the above three issues prove. And when they come with enhanced fundamentals, strong dividends and low price-to-earnings multiples, who can resist?

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