Closed-end funds (discounts etc)

this feature of closed-end funds to trade at a discount to NAV tends to be less significant in the larger market capitalised funds investing into large capitalised companies whose shares are themselves quoted on approved stock markets - and more significant in small market capitalised closed-end funds investing materially into private companies whose shares are not quoted on approved stock markets

· market capitalisation (number of issued shares x market price per share) is important because the number and value of the fund shares in the stock market is vital in creating a satisfactory market in the shares (liquidity)

· similarly the nature of the investments of the fund is very important - the investments may be perceived to be higher risk and to the extent that they are not quoted on a stock market they are valued by the directors of the closed-end fund - greater risk may be perceived here too where there is not a ready market in the underlying investments and their value cannot be verified through a market place

· occasionally fund shares may trade at a premium to NAV - the strong demand for the fund shares may arise from such factors as consistent excellent performance of the fund manager - or the fund may be the only one investing into a niche area e.g. Estonia which might happen to be thought of as representing an attractive investment opportunity at the time

· the discount or premium can change over time making shares in closed-end funds more volatile (higher risk) than shares in the equivalent open-end fund (where a discount is impossible) - this is not necessarily bad news for the investor but he or she needs to be aware of the higher risk

· for example if the discount narrows between the date of purchase and the date of sale of the fund shares then the investor will actually enjoy a greater return compared with the equivalent open-end fund - conversely if the discount widens then the return will be less