The Hindu Business Line : Closed-end funds: Uninspiring show

If you participated in new fund offers in 2007, chances are you hold at least one or two closed-end funds. These funds, which close for fresh subscription after the initial offer period and lock in your investments for a specific period, were the flavour of the year in 2007.

As these funds are not subject to huge fluctuations in inflows and outflows that is typically a problem with open-end funds, fund houses claim that the closed-end structure allows them greater freedom to take a long-term view.

The closed-end structure has been particularly favoured for mid-cap and small-cap themes, as fund managers can take positions in relatively illiquid stocks, if they see long term potential. In the open end structure, where they have to meet redemption requests on a regular basis, this may be difficult.

Thanks to their relatively recent rise to prominence, there are only about 30 closed-end funds that have a track record of one year or more. Over the past year, however, funds in this category have declined by an average 18 per cent, against the Sensex decline of 12 per cent and the BSE 500 decline of 13 per cent.

Closed-end funds have not fared too differently from their open-end counterparts. As expected, mid-cap and small-cap focused closed-end funds have been among the worst performers. DSPML Micro Cap managed to contain declines better than open-ended DSPML Small and Mid-cap fund, though the former focused on under-researched, relatively illiquid stocks.

ING C.U.B fund also managed to contain declines to about 16 per cent over the past year, ahead of other mid-cap and small-cap equity funds. Franklin India Smaller Companies, on the other hand, was an underperformer, declining 27 per cent over the past year.

Closed-end funds were the launch-pad for some unique themes. Some have not clicked in this turbulent year. ABN Amro Sustainable Development fund, which aims to invest in stocks of socially responsible companies, is among the bottom rankers in the closed-end category, shedding 27 per cent.

Being contrarian has not worked for HSBC Unique Opportunities either.

Among the better performers were a few funds from the Tata banner: Tata Equity Management, which invests across market-cap ranges and hedges its exposure through positions in the derivatives market, Tata Tax Advantage and Tata Capital Builder.

Sundaram BNP Paribas Equity Multiplier and IDFC Tax Saver were others that managed to contain declines better than the benchmark indices.

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