Funds Investing

All freely traded liquid markets share common traits related to psychological pressures (fear and greed), but each differs as to fundamental relationships, trading mechanisms, and structural factors. Each market’s individual characteristics must be understood. Once this understanding has been achieved, proper evaluation of similarities or differences, as well as interrelated pricing effects, with other markets can be accomplished.

One market that allows easy application of Drach’s common stock analysis is closed-end funds, also known as publicly traded funds or closed-end investment trusts (CEITs).

Although one of the oldest forms of investment, closed-end funds are among the most misunderstood and consequently often overlooked investment areas. Their origin can be traced back to the establishment of a Belgian fund in 1822; thereafter they flourished, particularly among English and Scottish investors in the latter 1800s. The first U.S. fund was formed in 1893 and, until the time of the stock market crash of 1929, closed-end funds were the dominant form of publically owned investment companies. Read the rest of this entry »

Management’s income is usually based on a percentage of the market value of the securities in the fund. The larger the asset base is, the greater the income. Both open- and closed-end fund managers are (at least theoretically) compensated to provide superior investment performance. If the value of the assets being managed grows, the management fees expand proportionately. In addition to pressures associated with performance, the open-end fund manager is faced with problems that can arise form variable capitalization.

Statistically, there is virtually no question that the popularity of both closed-end and open-end funds varies with market conditions. When the market is high, especially during periods of excessive speculation, open- end mutual fund sales increase (sometimes very dramatically), and there is an increase in the number of new closed-end funds. When the market is depressed, open-end sales decline (sometimes redemptions dominate), and there are few new closed-end funds formed. Read the rest of this entry »