Morningstar Advisor - October/November 2011 - (Page 58)
Gray Matters
Crack Open Closed-End Funds to Avoid the Relevance Paradox
By Mike Taggart
Follow these rules to avoid CEF disappointment.
Income-seeking investors have long known the attraction of closed-end funds. With their use of leverage, income-oriented investment strategies, and ability to make regular distributions, most closed-end funds were built to deliver payment streams. But all too often, investors don’t get the results they were expecting. Simply put, some investors—largely unfamiliar with closed-end
funds—do not understand what they’ve invested in until it’s too late. Having reached a poor outcome, they conclude that the allure of closed-end funds isn’t worth what appear to be hidden risks. It’s a symptom of the relevance paradox. This paradox arises because, for any given issue, we only gather information that we believe is relevant. If you believe that
closed-end funds are just like stocks (after all, they trade on an exchange just like stocks), you will apply your stock-assessing methodology to closed-end funds and reach a largely uninformed conclusion. The same result will occur if you treat closed-end funds as bonds or traditional open-end mutual funds. The relevance paradox, then, causes investors to make the wrong—or
58 Morningstar Advisor October/November 2011
Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2011
Morningstar Advisor - October/November 2011
Contents
Contributors
Letter From the Editor
The Emotional Burden
Where Are You Going for Yield?
Ahead of the Curve
How to Use a ‘Collar’
Why Dividends
Is Bond Investing All Uphill From Here?
Four Picks for the Present
Investment Briefs
The Risks of Stretching for Yield
For Banks, Uncertainty Reigns
The Virtues of Dividends
How Well Do You Know Templeton Global Bond?
The Case for Dividends in Emerging Markets
Finding Refuge in Value
Swift, Smooth, and Silent
Crack Open Closed- End Funds to Avoid the Relevance Paradox
Getting Beyond Labels in the ‘To vs. Through’ Debate
Handling the Headwinds
Bonds, Short-Term Bonds
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
A Prisoner of Pricing
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