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By Jeremy Glaser and Steven Pikelny | 11-07-2012 02:00 PM

Getting Creative With Foreign-Focused CEFs

Morningstar's Steve Pikelny discusses his closed-end fund ideas for international fixed-income and equity exposure and the advantages for using CEFs in these areas.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Should investors who are looking to gain some global exposure consider closed-end funds? I'm here with Steve Pikelny, a closed-end fund analyst at Morningstar. We're going to look at some potential options.

Steve, thanks for joining me today.

Steve Pikelny: Thanks for having me.

Glaser: So, let's talk a little bit about why investors might want to look at the closed-end fund structure for investing abroad instead of, say, an open-end fund or an exchange-traded fund or some other option.

Pikelny: Well, the big advantage that closed-end funds have over other investment vehicles is that they have, like the name implies, a closed capital structure. So, that means a fund manager is working with a relatively fixed amount of capital, and they can make their investments which means that they're not forced to go out and find more securities which may be illiquid in an up market and in a down market they will be forced to sell these securities for a potentially unfavorable price. So, this means that the managers can kind of venture into the less liquid markets, a lot of emerging markets and other international markets, and they could also use leverage, which obviously has the potential to boost income and capital gains.

Glaser: Let's take a look at some individual funds then that could potentially, use some of these advantages. What are some of our favorites in this space?

Pikelny: One of our favorites is FAX which is Aberdeen's Asia-Pacific fixed income fund, and that fund's interesting because it invests about half of its assets into the Australian debt market, and Australia has traditionally been a very fiscally conservative country, so there isn't a lot of credit risk there, but at the same time, their bonds do have relatively high yield. And then the other half of the portfolio kind of ventures into non-Japanese, Asian fixed-income markets. So, it goes into China, India, Thailand, Malaysia, and a lot of those countries.

There aren't many options that investors have to kind of gain exposure to this region. Aberdeen also has offices in those actual locations. So, they're not just sitting at a computer somewhere in Philadelphia, trying to infer what's going on in these countries. They're actually on the ground and looking at the stuff. They also have a small leverage ratio. So, that also serves to amplify income.

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