Alternatives to mutual funds
For discouraged investors, other products are available. Closed-end funds (CEFs) are mutual funds that are sold on the exchanges like stocks. Openend mutual funds are sold directly to investors; every dollar invested adds to the assets under management and management fees. After an initial public offering to raise capital, CEFs are bought and sold between investors at whatever price investors are willing to pay. The price of a CEF can be higher or lower than the value of the stock held by the fund. CEF managers are only able to offer new shares if returns have been good and the fund becomes popular. However, the prices of CEFs are volatile.
Closed-end funds are subject to mass psychosis. When certain stocks are hot, CEFs owning those stocks can sell for several times net asset value (NAV). Investors often experience overconfidence and grandiosity. When these stocks are unpopular, CEFs plunge to a fraction of NAV. When CEFs linger below NAV for long periods of time, frustration sets
in. Often shareholder suits are filed to open up the fund and distribute assets at NAV. CEFs are also subject to management changes and style changes. In addition, CEFs are often taken over by outside management companies and converted into larger funds. Spreads and commissions on CEFs are often painful. Closed-end funds are outside the comfort zone of most mutual fund investors.
