June 22, 2010 - There aren't many places you can buy dollars at a discount. One of them is in Closed End Funds (CEF). There are many varieties of CEF's and many of them are selling below their net asset values. That means you can buy dollars for less than a dollar. Here's how it works.

These CEF's trade mostly on the New York Stock Exchange. The symbols for the above funds are JEQ (Japan Equity Fund), MXF (Mexico Fund), and KF (Korea Fund). You can find all funds at www.closed-endfunds.com . They are fairly liquid, but smaller funds will not have the trading volume and may be more difficult to buy or sell without moving the price. Remember, there is no buyer for these except the public. In Open End Funds, the kind where there are shares being bought and sold by the issuing fund, there is no problem with liquidity.

This is where a shrewd investor can find great bargains, buying dollars at a discount. By looking at funds that are selling below their Net Asset Value (NAV), investors can buy funds that have stocks and other investments that are worth more than the price of the fund. For example, at the Closed End Fund site referenced above, there is a screener that brings up funds that are selling at a discount. The largest discount to NAV (which is simply the value of all assets divided by the number of shares outstanding) is in a fund called Equus Total Return Inc (EQS). The NAV is $5.66 (for June 17, 2010). The market price for the fund (trading on the NYSE) is $2.69. That's a discount of 52.47% or buying $1 for 48 cents. Other examples: Canadian World Fund (T.CWF) with a discount of 34.91%. Foxby Corp. (FXBY) with a discount of 29.60%.

So why are these "bargains" available? Because investors are worried these funds won't perform because their investments are very risky or that the economic cycle will hurt their returns or any number of other reasons that made many investors sell these funds, pushing their prices lower. Until the prices get to levels where other buyers appear, there is no limit to how low they can go. Without the fund ready to buy any shares, the market establishes its true value. In these cases, it's obviously not the Net Asset Value.

As with any investment, you need to do in-depth research to determine if these types of funds fit your risk profile and/or portfolio. It's a very good way to invest in certain parts of the globe or stocks or bonds because they give good diversification as well as professional management. Be sure to read the prospectus for any fund you find of interest because it will detail all expenses as well as the exact way your money will be invested.

Of course, the big advantage: some of these funds are selling for bargain basement prices as investors' fears have driven prices well below their NAV's. Sometimes there's a good reason for those fears. Others are selling cheap only because a worst case scenario is anticipated. If that doesn't happen, the gap between th price of the fund and the NAV will close, making for a better return than just what the fund itself is generating.

- Ted Allrich