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Subject:  Re: Closed End Mutual Funds Date:  3/19/2001  7:07 PM
Author:  Chipsboss Number:  6391 of 20632

A closed-end mutual fund acquires a fixed number of shares at the time it closes (it could have been an open-end fund at one time). This fund may not add to the shares in the fund.

Do you mean by this that closed-end funds cannot buy or sell anything within the funds after closing? That is not so. Active trading within a closed-end fund is generally legal and common. The number of outstanding shares of the closed-end fund is fixed (but see below). If you want to get into or out of a closed-end fund, you must find someone to sell you his shares or buy yours. The number of shares of any particular stock held inside the closed-end fund is not fixed. So, in your example, the management of the closed-end fund could sell all of its Cisco and buy, oh say, Intel.

Further, the closed-end fund may sometimes add to the number of its shares outstanding by creating and selling more shares. (Open end funds do that every day when they have more purchases than redemptions.) Bergstrom Capital (BEM), for example, created new shares some years ago. It offered the shares first to existing share holders. Also, a closed-end fund may reduce the number of outstanding shares by buying them on the open market and retiring them. Management may do this to keep a discount from growing too large, or to capture that discount for the benefit of shareholders who do not sell. BEM has done this too. (I have held BEM in my IRA for about twenty years.)

You can read up on closed-end funds at "Supply and demand determines the price of the closed-end fund. When demand is high, investors are willing to pay a higher price for the fund. When demand is low, the share may sell at a discount." Supply and demand for the shares in the closed end fund's portfolio determine its net asset value per share. Then, supply and demand for shares of the funds itself determine whether those shares sell for more or less than net asset value.


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