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Twenty-First
Securities Corporation
780 Third Avenue
New York, NY 10017
212.418.6000
info@twenty-first.com

Winter 2006, Volume IX, Issue 1

Mutual Funds: Gain Without Pain

This article was published in March 2006 by Risk-Controlled Investing, Charter Financial Publishing Network, Charter Financial Publishing Network, Shrewsbury, NJ 07702. 732-450-8866.

Mutual fund shareholders sometimes find themselves owing capital gains taxes on their funds in years when they have not redeemed any shares or taken any income out of their fund. Sometimes they may owe capital gains taxes on funds that have actually lost value. The reason is that mutual fund realized capital gains flow through to participants near the end of each year. But investors may diminish the effect of this problem if they choose funds with embedded capital losses. Capital losses do not flow through to investors but can be used to shelter future capital gains taken by the fund.

For this reason, in the past, Twenty-First Securities has suggested that mutual fund investors consider funds with capital loss carryforwards. An investor should not buy into a fund just because it has loss carryforwards, but if a fund has an investment style that you’re looking for, then large loss carryforwards may make it even more attractive.

One possible problem with this approach is that open-end funds can always dilute their losses by issuing more shares to new investors. For example, suppose a fund has 10 million shares outstanding and total capital losses of $100 million; that fund’s loss per share is $10. But if that fund issues another 10 million shares, the capital loss per share falls to only $5.

Investors can avoid this dilution effect by looking for embedded capital losses in closed-end funds. A closed-end fund, by definition, cannot issue new shares. So the loss carryforward, in effect, is safe from dilution.

Research by Herzfeld Advisors shows that a number of closed-end funds have substantial embedded losses - especially high income/high yield funds and funds investing in Asia. For example, the Thai Capital Fund has a loss carryforward that is bigger than the total assets in the fund. With Dreyfus High Yield Strategies Fund, the price is $3.95 per share while the loss carryforward is $9.01 per share. So these funds can afford many good years before the fund would need to pay capital gain distributions.

A list of closed-end funds that, as of November 2005, have a large proportion of capital losses per share is set forth below:

Type	Symbol	Name	NAV	Loss Carry- forward	Loss As % Of Assets
Specialized Equity	FXX	Foxby Corp.	2.42	6.37	263%
Bond	DHF	Dreyfus High Yield Strategies Fund	4.51	9.01	200%
Bond	HIS	CIGNA High Income Shares	2.61	4.67	179%
Bond	PHY	Prospect Street High Income Portfolio	3.20	5.56	174%
Foreign Equity	TF	Thai Capital Fund	8.91	14.85	167%
Foreign Equity	MF	Malaysia Fund	5.76	7.32	127%
Bond	HYF	Managed High Yield Plus Fund	4.74	5.72	121%
Bond	HYP	High Yield Plus Fund	3.73	4.28	115%
Bond	DHY	Credit Suisse High Yield Bond Fund	4.13	4.5	109%
Bond	AMF	ACM Managed Income Fund	3.94	4.18	106%
Foreign Equity	TTF	Thai Fund	8.23	8.57	104%
Foreign Equity	GRR	Asia Tigers Fund	13.87	14	101%
Bond	ZIF	Zenix Income Fund	2.95	2.93	99%
Foreign Equity	TFC	Taiwan Greater China Fund	5.15	5.05	98%
Bond	MSY	Morgan Stanley High Yield Fund	6.57	6.19	94%
Bond	HYB	New America High Income Fund	2.15	1.89	88%
Bond	CIF	Colonial Intermediate High Income Fund	3.60	3.01	84%
Foreign Equity	ETF	Emerging Markets Telecommunications Fund	13.01	10.22	79%
Bond	VLT	Van Kampen High Income Trust II	4.26	3.28	77%
Foreign Bond	MGB	Morgan Stanley Global Opportunity Bond Fund	7.99	6.07	76%
Bond	CIK	Credit Suisse Income Fund	4.20	3.15	75%
Bond	CIM	CIM High Yield Securities	4.25	3.17	75%
Bond	BHY	BlackRock High Yield Trust	7.47	5.53	74%
Bond	CYE	Corporate High Yield Fund III	8.42	6.16	73%
Bond	ADF	ACM Managed Dollar Income Fund	8.04	5.82	72%
Bond	HIO	High Income Opportunity Fund	7.05	4.41	63%
Bond	MHY	Managed High Income Portfolio	6.84	4.23	62%
Foreign Equity	GF	New Germany Fund	11.17	6.81	61%
Foreign Equity	KEF	Korea Equity Fund	8.70	5.3	61%
Foreign Bond	LBF	Scudder Global High Income Fund	8.92	5.43	61%
Foreign Equity	IF	Indonesia Fund	5.34	3.22	60%
Foreign Equity	JFC	Jardine Fleming China Region Fund	14.85	8.25	56%
Bond	COY	Corporate High Yield Fund	8.49	4.57	54%
Bond	CNN	Prospect Street Income Shares	6.21	3.32	53%
Foreign Equity	ZSEV	Z-Seven Fund	5.77	2.93	51%
Bond	PTM	Putnam Managed HighYield Trust	9.00	4.44	49%
Bond	DSU	Debt Strategies Fund	6.43	3.09	48%
Bond	KHI	Scudder High Income Trust	5.87	2.72	46%
Bond	ARK	Senior High Income Portfolio	5.83	2.7	46%
Specialized Equity	CWF	Chartwell Dividend and Income Fund	8.57	3.94	46%
Specialized Equity	ZF	Zweig Fund	5.62	2.38	42%
Bond	PHF	Pacholder HighYield Fund	8.88	3.72	42%
Specialized Equity	MVC	MVC Capital	10.41	3.99	38%
Bond	HYI	High Yield Income Fund	5.44	2.05	38%
Convertible	CVT	TCW Convertible Securities Fund	5.41	2.01	37%
Foreign Equity	JEQ	Japan Equity Fund	7.86	2.9	37%
Bond	CFD	40/86 Strategic Income Fund	10.71	3.91	37%
Specialized Equity	AMO	Alliance All-Market Advantage Fund	14.41	5.09	35%
Bond	FT	Franklin Universal Trust	6.85	2.37	35%
Foreign Equity	SGF	Singapore Fund	10.69	3.59	34%
Foreign Equity	TWN	Taiwan Fund	14.39	4.36	30%
Foreign Equity	APF	Morgan Stanley Asia Pacific Fund	15.96	4.71	30%
Bond	PPT	Putnam Premier Income Trust	7.03	2.05	29%
Equity	CRF	Cornerstone Total Return Fund	11.02	3.09	28%
Municipal Bond	CMU	Colonial Municipal Income Trust	5.73	1.55	27%
Loan Participation	PPR	ING Prime Rate Trust	7.41	1.98	27%
Foreign Bond	MSD	Morgan Stanley Emerging Market Debt Fund	10.84	2.85	26%
Municipal Bond	CXE	Colonial High Income Municipal Trust	6.44	1.61	25%
Bond	HSF	Hartford Income Shares Fund	7.82	1.9	24%
Specialized Equity	EQS	Equus II	11.40	2.46	22%
Equity	TY	Tri-Continental Corp.	21.73	4.67	21%
Bond	HIF	Salomon Brothers High Income Fund	10.43	2.17	21%
Bond	HIX	Salomon Brothers High Income Fund II	11.47	2.35	20%
Bond	ACG	ACM Income Fund	8.11	1.66	20%
Bond	BKT	BlackRock Income Trust	6.53	1.27	19%
Bond	PIM	Putnam Master Intermediate Income Trust	6.98	1.34	19%
Municipal Bond	PYM	Putnam High Yield Municipal Trust	7.76	1.48	19%
Municipal Bond	AMU	ACM Municipal Securities Income Fund	11.08	2.11	19%

Sources:
NAV : Bloomberg. http://www.bloomberg.com, November 10, 2005.
Loss Carrryforwards: Thomas J. Herzfeld Advisors, “Survey of Closed-End Fund Loss Carryforwards,” The Investor’s Guide to Closed-End Funds, November 2005. Used with permission.

Investments in mutual funds involve risk, including, without limitation, the risk that these funds may employ leverage and other speculative investment practices, and that an investor can lose all or a substantial part of his investment.

Before buying a mutual fund, investors should carefully consider the fund’s investment objectives, risks, and charges and expenses. Fund prospectuses contain this and other information. Investors may obtain prospectuses at http://www.sec.gov/edgar.shtml. They should read prospectuses carefully before investing.

This article and other articles are provided for information purposes only. They are not intended to be an offer to engage in any securities transactions or to provide specific financial, legal or tax advice. Articles may have been rendered partly inaccurate by events that have occurred since publication. Investors should consult their advisers before acting on any topics discussed herein.

Options involve risk and are not suitable for all investors. Before engaging in an options transaction, investors must review the booklet "Characteristics and Risks of Standardized Options".