Why You Can't Sell Closed-End Funds for the Full Value of the Shares

• 1). A closed-end fund begins as an offering of its shares in much the same way that a publicly traded stock begins with an IPO, an initial public offering. Note that an IPO doesn't represent the value of the company's tangibles--things like building and equipment. It sells for what buyers will pay for it. A hot IPO like Google came on the market at many multiples of the value of its tangibles because investors thought, rightly, that the company would make a lot of money.
  
  
• 2). A closed-end mutual fund begins as an offering and, like a stock, its initial price doesn't reflect the exact value of the underlying shares. It reflects the value of the underlying shares plus or minus the value that buyers attach to the fund's managers less their management fees.
  
  
• 3). To understand this a little better, think of Warren Buffett's Berkshire Hathaway Company (symbol: BRK). It sells like a stock, but there's no underlying business. Instead, Berkshire Hathaway holds important positions in other companies. As these underlying values rise and fall, so does the value of BRK, but not in concert. Investors believe that when Buffett invests in a company he exerts a positive influence on its management and that as a result the company's stock price will rise. So investors have almost always been willing to pay more for BRK than the present underlying value of the shares BRK owns.
  
  
• 4). Similarly, investors in an on-going closed-end fund don't look to the value of the underlying shares alone; they consider the strategic value of the fund's managers and the expense of their management. Usually, they attach a negative value to the strategic value, take the expenses into negative account and discount the underlying share values accordingly.
  
  
• 5). In the rarest of instances, a closed-end fund will dissolve--sell off its holdings and go out of business. At the point of dissolution the distribution of the funds to the shareholders will come close to the value of the underlying shares--usually for an amount equal to the face value of the shares minus dissolution and management fees. Except in this instance, you can't redeem the shares held by a closed-end fund for their full value on the open market.