When it comes to investments, Scott Schultz is adamant about what he likes and what he doesn't like. And what he doesn't like, he really doesn't like.
In the former case, it's a type of security with which many retail investors might not be overly familiar. In the latter, it's one you probably know very, very well. "I just frankly don't have a lot of respect for the ETF market," says Schultz, who has been in the investment management industry for 28 years. "They're designed for perfection to be average."
That's right. The exchange-traded fund, the investment type that has become a go-to vehicle for professionals and individual investors alike for more than a decade, ranks high on his most-despised list.
His distaste for ETFs aside, what he does recommend, not only with conviction but with a good track record to boot, isn't necessarily what you probably think about when you're making your investment choices -- closed-end funds. Yes, closed-end funds.
Maybe you've heard of them, but what are they exactly? In short: A CEF is an exchange-listed security, with a fixed-capitalization, that trades with bid and ask prices, just like a stock. Unlike an open-end mutual fund, whose price is based on net asset value calculated at the end of each day, a CEF can trade at a discount or a premium to NAV. The idea is for an investor to purchase the CEF at a discount to its net asset value, and then profit from the appreciation.
Schultz, a Michigan-based independent portfolio manager, has for more than two decades been espousing the virtues of closed-end funds and doing right by his clients. Earlier in this decade, his CEF long-only strategy earned him the No. 1 separate account manager ranking from USA Today, based on three straight years of Morningstar data, including the "crash" year 2000. Now, he's sharing his views on CEFs with the rest of the world via his book, "Scott Schultz's Guide to Closed-End Funds." His goal is to tell you what you need to know about CEFs and to explain why you should strongly consider whether they belong in your portfolio. The book, he says, is for all levels of investor, from the least to the most sophisticated among us.
"I have one product, and I believe in it," he says. "Why has the general public been kept in the dark [when] 17.9% of the securities listed on the New York Stock Exchange are closed-end funds?"
His answer: "Laziness and greed." Translated, he contends that it takes significant time for a broker sitting at his or her desk to do the proper research and to educate their clients on CEFs -- analyst reports aren't readily at hand the way they might be for a widely held stock. On top of that, for most financial advisers, closed-end funds aren't likely to provide the best return on their time and expertise. "I was in the wirehouse system for 11 years, and I reject it categorically," Schultz says.
Early on in his book, he addresses the skepticism he often encounters about CEFs and states his views on them in pretty clear terms. "If these CEFs are as great as you say, why aren't more people investing in them? My honest answer: I don't know. Why do people not use a discount coupon when buying eggs or milk? My experience has taught that CEFs are investment gems. For qualified people deciding not to use them would be akin to fish deciding not to swim."
Schultz got his start in investment management in 1983 working for E.F. Hutton. He became interested in closed-end funds in 1988 during a hiatus from his career to pursue a seat in Congress. He didn't get to Washington, but he did learn something he didn't know before, and he's still preaching it. That was the potential for more predictability and profit from investing with CEFs.
"I saw that these vehicles had a very consistent pattern," he says. "It's the only vehicle I know of you can purchase below net asset value and have the same diversification of a mutual fund."
Though CEFs aren't necessarily a one-size-fits-all approach, Schultz says an investor working with an adviser can set up a portfolio of the funds using a variety of asset areas, from municipal bonds to energy stocks.
None of this is meant to say it's a given that you'll profit with CEFs. A product purchased at a discount isn't guaranteed to gain in value. And what if the discount doesn't go away or becomes even greater? It happens. As with any security, you can lose money, and it's crucial to know that not every CEF goes up.
For investors who want to learn more, and there's much more than can be covered here, preview copies of the book are available for order at the web site http://www.closedendfundguru.com/.
- Scott Schultz