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I have been thinking about putting my money into closed-end bond funds instead of a bond ladder. I reason that I can get more diversification and a manager that knows more than I about the risks involved.

I read this on the Closed-End Fund Association's website at the advantages of closed-end funds:

1. Portfolio Stability.
When the market takes a tumble, mutual fund managers must have the liquidity to redeem shares. But closed-end funds, which include a wide range of bond funds and funds that have other types of investments in addition to equities, are a different breed. As the value of closed-end fund portfolio holdings ebb and flow, investment decisions by portfolio managers are made purely on long-term strategies, rather than being driven by outflows. The converse also applies: in a booming market, closed-end fund managers aren't flooded by cash they must invest at rising prices, as is often the case with successful mutual funds.

I call that insulation from market reaction “portfolio stability,” and it's just one of my top five reasons closed-end funds should be attractive to investors in volatile markets.

2. Analyst objectivity.
Much has been made lately of securities analysis when it is coupled with investment banking or other aspects of “sell-side” research. Closed-end funds employ only “buy-side” analysts whose sole mission is to strengthen the company's portfolio. At the two funds I manage, Adams Express Company and Petroleum & Resources Corporation, we are not sell-side analysts and our analysts' focus is solely on the performance of their securities selections.

3. Investor control.
While mutual fund orders are closed at end-of-day net asset value, closed-end funds trade just like any other stock and can be traded throughout the trading day. An order to buy or sell early in the day is executed when the trade is placed, not at the end of the day.

4. Lower expenses.
Unlike mutual funds, closed-end funds do not have ongoing costs for distribution of shares. For this and other reasons, the expense ratio of the average closed-end fund is substantially less than that of the average mutual fund. Over time, a lower expense ratio can boost investment performance.

5. Strategic clarity.
Most closed-end funds focus on consistent investment objectives such as capital appreciation or current income, whether they specialize in domestic or international stocks or fixed-income securities. Many tightly focused closed-end funds have been established to invest in a given country, region of the world or industry sector. Investors can easily match their preferences to the styles and objectives of closed-end fund managers.

The corporate bond funds seem to pay a higher dividend rate than corporate bonds. What is the dark side of them?

Me and the Kittys
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