TITLE

Performance of Levered Closed-End Funds

AUTHOR(S)
Martin, Rand; Malhotra, D. K.
PUB. DATE
February 2009
SOURCE
Journal of Financial Planning;Feb2009, Vol. 22 Issue 2, p46
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
• Closed-end bond and equity funds often leverage their assets by borrowing during low interest rate environments and reinvesting in securities that pay higher rates, thereby enhancing returns. The risk is that when stock or bond markets significantly decline—as now—levered funds will underperform versus unlevered closed-end funds. • This paper investigates whether leverage improves the performance of closed-end funds by using the traditional measures of portfolio performance by Treynor, Sharpe, and Jensen; the M² measure by Modigliani and Modigliani; and regression analysis. • The study periods reflect the years that Morningstar data show closed-end funds using leverage: 1996-1998 and 2002-2006. • Results with the traditional measures and the M² measure indicate that closed-end bond funds usually do not benefit. • Results for closed-end equity funds are mixed, but generally do not show higher returns with the use of leverage. • Regression results also do not support the use of leverage. • Financial planners should be cautious in recommending closed-end funds solely on the basis of their use of leverage.
ACCESSION #
36617280

 

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