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Rob Carrick

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Far-flung treats

Rob Carrick


OTTAWA (GlobeinvestorGOLD) — Indonesia, South Korea and Brazil: think of them as the United Nations of hot-performing stock markets.

Any of the benefits from these far-flung markets trickling into your portfolio? Maybe a little if you own an emerging market fund, but probably not if your global exposure is limited to mainstream global equity funds. Care to address this imbalance? With the demise of the 30-per-cent foreign content limit for registered retirement plans at hand, you’ve got a lot more flexibility to do this by investing in closed-end funds listed on the New York and American stock exchanges.

These closed-end funds are volatile critters than can quickly chew up a sizable piece of your capital. In March, the Templeton Russia & East European fund dropped 8.8 per cent during one particular week, while the Turkish Investment Fund and Mexico Equity & Income Fund had nastier weeks in which they plunged 11.8 and 10.4 per cent, respectively. But with this downside risk you also get the potential for monster-sized gains.

The Indonesia Fund is up a cumulative 184 per cent over the past three years, while the Korea Equity Fund rose 26.54 per cent in the past 12 months and the Brazil Equity Fund is up 40 per cent in the past year and 81.2 per cent in the past three years. Even the Turkish Fund has had its good days — over the past three years it has returned a total 160 per cent.

Closed-end funds are best thought of as mutual funds that you buy like a stock rather than through a fund company. Don’t confuse closed-end funds with exchange-traded funds. Whereas ETFs generally track stock or bond indexes, closed-end funds hold stocks and/or bonds chosen by a portfolio manager. Closed-end funds have grown a lot in popularity in Canada the past few years, but mainly as a way to package income trusts for investors who don’t want to choose their own securities. Single-country funds have long traded on U.S. exchanges, but with little fanfare.

Their obscurity hasn’t stopped the closed-end sector from offering an incredible variety of ways to invest in the stocks and bonds of countries around the world. Certainly, there are more single-country funds available in a closed-end format than in an ETF format (most single-country ETFs trade on the Amex, but some are listed on the NYSE). Interested in participating in the explosive economic growth in China? There are several closed-end funds that offer exposure to Chinese stocks. Do you feel that India’s the better story right now? Naturally, there’s an India Fund.

One of the more appealing attributes of closed-end funds is that they’re run by some of the top names in money management. The Templeton organization, which in Canada runs the giant Templeton Growth Fund, offers several closed-end funds listed on the NYSE. Other names in the field include Morgan Stanley Investment Advisers, Credit Suisse Asset Management, Deutsche Bank Group and Nomura Asset Management. With their global reach, it’s a natural for firms like this to run country-specific funds.

If you’d like to know more about closed-end funds, the website to visit is the Closed-End Fund Centre. You’ll be able to screen for funds on this site and look at fund profiles that address the all-important premium/discount issue. Hot closed-end funds may trade at a premium to their net asset value, while out-of-favour funds trade at a discount. The up-and-down Turkish Fund traded in late March at a 19.1-per-cent premium, while the Brazil Fund traded at a 5.8-per-cent discount. The Brazil Fund’s discount sounds promising, but if you look at the profile of this fund you’ll find that the 10-year average discount is 13.73 per cent. If you’re thinking of buying into a fund trading at a premium, you should know that old hands in the closed-end sector like to say that all funds trade at a discount eventually.

Because they offer mega-risk and well as the potential for mega-returns, single-country closed-end funds should never account for more than 5 per cent of your portfolio. One last piece of advice is to think of closed-end funds as a speculative investment that you’ll sell to lock in any gains. For a long-term relationship, try a global equity fund.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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