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Three Closed-End Funds That Are Delicious--With or Without Gravy

We serve up the three CEFs on our coverage list with the highest Morningstar Analyst Rating.

Mike Taggart, CFA, 11/24/2011

Thanksgiving dinner. For most Americans, the very thought conjures memories of family, friends, and traditions stretching back to childhood. Regardless of where we are in the economic cycle, through good times and bad, Thanksgiving ushers in a period of racing to and from stores, holiday parties, and the like. The madness can be overwhelming and leave little time for reflection. But before all of that mayhem ensues, the Thanksgiving dinner itself reminds us of life's simpler pleasures.

It's also a good time to take stock of what has transpired during the year. Back in January, we began publishing reports on closed-end funds, or CEFs, based on Morningstar's Global Analyst Rating methodology. Since then, we have launched coverage on nearly 90 CEFs. These reports, available to Premium Members of Morningstar.com, run to four printed pages (five if they are in a PDF format). In 12 different sections, we consider topics such as leverage, fees, the investment process, the portfolio, past performance, and management.

In the end, our assessment of the CEF is summarized by our qualitative, forward-looking rating. This rating is meant to serve as a guidepost, alerting investors as to which CEFs we believe are best positioned to outperform their peer group over a market cycle, on a net asset value basis. This rating, like the star rating, is not meant to be an explicit buy rating, as we believe investors themselves are best suited to make that decision, based on their investment objectives and asset-allocation needs. This rating, then, is meant to serve as another tool to help you decide which investment vehicle can best help you reach your goals.

For this holiday, we have decided to share with all of our readers the Morningstar Opinion section from the reports on the three highest-rated CEFs under full analyst coverage.

Have a Happy Thanksgiving!

Aberdeen Asia-Pacific Income FAX
(The opinion was written on Oct. 24.) Aberdeen Asia-Pacific Income FAX is the only CEF that provides investors with an avenue to the difficult-to-reach debt markets of developing Asian nations as well as Australia. Moreover, managers undertake an extremely comprehensive investment process in an attempt to locate undervalued securities in these markets. As these regions capture larger and larger portions of the global economy and as the debt-addled developed economies continue to falter, investors looking for diversified income will be hard-pressed to find a better option. For these reasons, we give this fund our top rating.

The fund was launched by the Australian EquitiLink Group in 1986 as the First Trust Prime Australian Income Fund and was one of the few funds available for investors to gain access to the Australian sovereign debt market. Aberdeen acquired EquitiLink, and hence this fund, in 2000. Keeping with the tradition of providing investors with access to new markets, Aberdeen expanded the fund's investment policy, allowing it to invest in Asian debt as well. These markets are highly illiquid, and the fund's size allows it to take advantage of lower transaction costs. China and India, for example, require foreign investors to buy a license in order to invest in non-U.S. dollar-denominated bonds issued within their borders. However, a fund of this size (with close to $2 billion in total assets) still has to be mindful of the liquidity problems associated with investing in the region.

Portfolio managers don't just conduct regional and sector research by sitting at a computer but actually travel to the regions they plan to invest in and observe their economies firsthand. The team has offices in Singapore, Bangkok, and Sydney and also makes use of other Aberdeen offices around the world to formulate a global macroeconomic outlook. This allows managers to acquire the necessary information to invest in these regions that the individual U.S investor may not have access to. The fund's in-depth process has rewarded investors with an annualized total return of 12.7% over the past 10 years.

Mike Taggart, CFA, is the director of closed-end fund research at Morningstar.
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