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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.


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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