WHY NOW MAY BE THE TIME TO OPEN YOUR WALLET TO CLOSED-END FUNDS FUNDS ON SALE! AMID THE GREATEST BULL MARKET IN HISTORY, CLOSED-END FUNDS ARE ABOUT AS CHEAP AS THEY'VE BEEN IN YEARS. HERE'S HOW TO FIND TOP CHOICES AT TERRIFIC PRICES.
By JASON ZWEIG

(MONEY Magazine) – Where can you get great funds at a discount? In the backwater of the mutual fund business, that shallow pool called closed-end funds, where values are better than they've been in years.

Okay, let's get it out of the way at the start: Closed-end funds are weird. Unlike open-end funds, which issue new shares whenever you want them, closed-ends have a fixed supply of shares that trade on exchanges or over the counter like stocks. You can always buy shares in an open-end fund at the per-share value of the fund's assets, or net asset value, plus any sales charge. But since more people might want to sell a closed-end fund's shares than buy them at any given instant--or vice versa--its shares are rarely priced at net asset value. More buyers than sellers? The shares will trade for more than they're actually worth--at what's called a premium. More sellers than buyers? Then the shares will change hands for less than their value--at a discount.

These days, the median discount on closed-end U.S. stock funds is 10%, which means you can buy a dollar of assets for 90¢, nearly the cheapest level since Saddam Hussein spooked the stock market in 1990. Bond funds are also at a 10% discount, the steepest in more than a decade. And foreign stock funds are at a 9% discount.

Why are the discounts so large? Supply and demand. In 1992, Wall Street began breeding closed-end funds like wild: 101 new ones were born, raising $18 billion. In 1993, 121 new funds raised $18 billion more.

The result of that binge? A big hangover. Listen to Beau Ogden, an investment banker at Smith Barney in New York City: "In 1993, we had a line of issuers stretching around the block to do new closed-end deals. In 1995, only a handful have even come to talk to us. The marketplace is almost completely demoralized."

And that means it's a good time to buy. "It's an investor opportunity," says Donald Cassidy, head of closed-end fund research at Lipper Analytical Services in Denver. "With fewer new funds coming along, there should be less risk that discounts will worsen."

Some solid choices? Among closed-ends that invest domestically, conservative Adams Express (ticker symbol: ADX; recently traded at $18.50 to yield 2.7%; discount from net asset value: 13%) favors blue chips and energy-related stocks. Baker Fentress (BKF; $16.75; 2% yield; 23% discount) mixes renowned growth stocks with such oddities as a Florida citrus grove developer and a private money-management firm. New Age Media (NAF; $14.88; 0.4% yield; 17% discount) is a cut-rate way to bet on technology. Salomon Bros. Fund (SBF; $13.38; 2.4% yield; 13% discount) likes steady growth stocks.

Overseas, Europe Fund (EF; $12.75; 6.9% yield; 11% discount), Germany Fund (GER; $11.38; 3.1% yield; 16% discount) and New Germany (GF; $11.63; 1.4% yield; 24% discount) invest pretty much as their names suggest. If you can stomach the risk of emerging markets, consider Latin America Investment (LAM; $14.75; 1.3% yield; 14% discount), which invests south of the border, or Templeton Dragon (TDF; $13.38; 3.5% yield; 8% discount), which shops mainly in Southeast Asia. (All these funds are listed on the New York Stock Exchange; yields may include both dividends and capital gains and can vary greatly from year to year.)

As enticing as those bargains are, investors wading into the closed-end pool must be careful. Here are some rules that will help keep you and your portfolio afloat.

A bad fund is never cheap. All Seasons Global Fund has returned a measly 3% annually over the past five years, less than you could earn by keeping your money in the bank. Even at its recent 20% discount, it's a dog.

Never buy a closed-end fund in its initial public offering. Brokers often suggest that new closed-end funds carry no commission. But a 6% to 7% underwriting fee is built into the initial price. That means you will pay a dollar for maybe 94¢ worth of assets. Let's not mince words: Closed-end initial offerings are a rip-off. Wait a few weeks after the fund begins to trade and you'll usually get a much better price

Never pay a premium for a closed-end. A broker or analyst may tell you that a certain closed-end fund is unique and thus worth paying a premium to own. But shelling out more than a dollar for a dollar of assets never makes sense. If a closed-end isn't trading at discount, don't buy it.

Reinvest your dividends. When a fund trading at a discount distributes dividends or capital gains, you get to buy more shares at the discounted price. That's a great perk, and it's why you should sign up for a dividend reinvestment plan at your broker (if it's free) or with the fund. Over the years, these dividends at a discount can give a nice boost to your returns.

Control your costs. Your commission to buy (and sell) a closed-end will eat up much of the discount, especially if you buy a small number of shares. So be prepared to own the fund for at least five years to work off the impact of that cost. And if a fund's annual expense ratio is too high--above 1.4% for a domestic stock fund, 2% for a foreign stock fund or 1% for a bond fund--don't buy.

--Jason Zweig