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Expert Analysis and Commentary

Paul Price: 20 Years of Outperformance (from a Fund You've Never Heard of)

Dr. Paul Price Oct 20, 2014

Knowing that, who wouldn’t want at least a nice portion of their investable assets in a mutual fund that specializes in this area of the market?

Royce Funds started the closed-end Royce Micro-Cap Trust (NYSE:RMT) on December 14, 1993. Unlike open-end funds, closed-end shares trade like individual company stocks. They have stock symbols and can be bought or sold anytime the market is open.

Patient and stalwart fund investors turned every $10,000 into more than $95,000. That’s the stuff dreams are made of. It required only one decision: Buy RMT and stick with it. Just imagine the total today for people that added more dollars along the way.

Closed-End Funds (CEFs) Offer Distinct Advantages

  • Managers: Not subject to pressures from cash additions or redemptions
  • CEFs are often available at discounts to NAV (net asset value)
  • CEFs can be bought or sold intra-day, like ETFs
  • CEFs are margin eligible if held in street name

Why don’t you hear more about them? Once they have begun trading, nobody has a vested interest in promoting them. Brokers are paid to sell funds that have sales charges. That’s why they almost never recommend this type of investment.

Despite superior long-term performance, a few weeks ago RMT was available for an 8.3% discount to its net asset value. 52-week shareholder return through Oct. 3, 2014, was a very respectable 14.3%.

Those with a “trading” mindset rather than a buy-and-hold mentality can use fluctuations in CEF’s premiums or discounts to NAV in the same manner that they use P/E ratios to judge buy and sell levels for individual stocks.

The Bottom Line

Closed-end shareholders always receive dividends based on full NAV, even if they purchase at discounted levels. That adds to the nominal yields on the funds’ underlying holdings. There are many high-quality, time-tested CEFs out there. In future articles I plan to cover some of my other favorites.

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