Max's Investment World Stock Market Challenge
Closed-end Funds Hot in Early January
Many investors are familiar with the "January effect,"
which is when stocks of smaller companies tend to outperform
stocks of larger companies early in that month. But January is
also a good month for the performance of closed-end funds that
were issued in the previous year. Closed-end funds sell a limited
number of shares and invest the proceeds in stocks, bonds and
other assets, just like regular mutual funds. They often trade
at premiums or discounts to their net asset value, or the actual
value of securities they hold.
Researchers argue that the January effect is due to investors
selling shares of small stocks (stocks with low capitalization
or equity) at the end of December for tax purposes, which hurts
their share prices. After the tax-selling period ends, small
company shares rebound in early January.
But John Peavy, of Founders Trust Company in Dallas, recently
found that the same phenomena applies to closed-end funds whether
they have small or large capitalizations.
Peavey examined closed end funds issued between 1986 and 1990.
He tracked the performance of the funds in the January of the
year after they were issued and found that closed-end funds outperformed
the market as a whole by 1.2 percentage points, on average, on
the first trading day.
Why?
Closed-end funds, on average, have performed poorly in the first
year they are issued. Peavey found that closed-end funds were
down, on average, by 19 percent from the time they were issued
to November 30 of the same year. He reasoned that investors would
want to sell them so they could offset capital gains on other
stocks.
Bottom line: Don't buy a closed-end fund in the hope that you
might pick up some small percentage gains. But if you are looking
to get rid of a closed-end dog at the end of the year, wait until
January to sell it.
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