Closed-end funds are an asset management company's dream business. The assets are almost completely "stuck" to the fund (unless an activist forces the fund to 'open') regardless of performance. But it should come as no surprise that many of these funds end up disappointing investors. When investors become disappointed they sell their shares in the closed-end fund on their respective exchange and move on, regardless of the fund's price relative to net asset value.

It's this system that forces many closed-end funds to trading below their net asset value. In fact, 82% of closed-end funds now trade for a discount to their net asset value, a significant increase since March (64%) according to an interesting article [subscription required] in today's Wall Street Journal.

I'd put "do not buy a closed-end fund at its IPO" as one of my core rules of investing. Many times investors are forced to pay a premium above net asset value when the fund first begins trading -- a move that investors regret most of the time.

However, that doesn't mean there's no opportunity in closed-end funds after they begin trading. In fact, funds at a deep discount to net asset value can often be very enticing value situations. When looking at funds below NAV I typically favor newly-discounted names (because it's often only due to one or two large sellers) or situations in which an activist is trying to convert the fund to being 'open-end' thus reverting the share price to its NAV.

Note: Premiums/discounts to net asset values can be found using ETFConnect.com.