How would you like to have the benefits of margin buying without the expense or risk of getting a margin call?

Well, it can be done. Instead of buying stocks and bonds in a margin account, paying interest on the margin debt, and worrying about a possible margin call if your holdings go down, we can achieve much the same thing using another type of investment.

We're talking about closed end mutual funds. These funds invest in a portfolio of stocks but their shares are sold on an exchange rather than redeemed at net asset value per share. Since the shares trade at whatever the market will pay, they may trade at a premium to the actual value of the underlying portfolio, or at a discount. Right now most closed end funds are selling at record discounts, regardless of their investment objective.

Let me give you an extreme example. The Morgan Stanley India Investment Fund was recently selling at $12.13 a share while the market value of the underlying portfolio was $18.50 a share. That's a discount of 34.5 percent. As a result, you get $1.53 in assets working for you for every $1.00 you invest.

As I said, it's like a having margin account without paying interest.

Why is this happening? There are two main reasons. One is a lack of sponsorship from the brokerage community. The other, and more recent, is the growing competition from ETFs--- the low cost Exchange Traded Funds that duplicate an index and trade through the day. On any given day the highest volume individual security on the American Stock Exchange is likely to be the SPDR, a trust that mimics the S&P 500 Index, operates at low cost, and trades through the day.

To build a basic portfolio I started from a Couch Potato-like premise. I wanted to put half the money in domestic equities and half in intermediate bonds. After that, I limited my search to funds that had done better than their open-end counterparts, were well rated by Morningstar (Four or Five stars), and selling at attractive discounts to net asset value.

Just as you can build your Couch Potato portfolio with two funds, Vanguard Index 500 and Vanguard Total Bond (You could also substitute Vanguard Intermediate Government or Vanguard GNMA for Total Bond), You can build your closed end fund portfolio with as few as two funds. In fact, I let things get a little complicated and chose four. Here they are:

• The market price of Central Securities (ticker: CET), which was mentioned in a recent column, was up 20.2 percent YTD at the end of May, and has beaten both the average managed domestic equity fund and the Vanguard Index 500 fund over the last three and five years. It has an expense ratio of 0.22 percent (nearly as cheap as VanguardIndex 500). In spite of all that, it sells at a 20 percent discount to net asset value. That means you get $10,000 working for you when you make an $8,000 investment. Morningstar, the Chicago investment data firm, classifies the fund as mid cap value and gives it a top, five star rating.


• American Select (ticker: SLA), a fund that invests in intermediate maturity domestic bonds, has done better than the average open-end taxable bond fund in recent years, sells at a discount to net asset value of 9.6 percent, provides a yield of 8.5 percent, and has a Morningstar rating of 5.



• Adams Express (ticker: ADX), is a domestic equity fund selling at a 14.1 percent discount to net asset value. The fund invests in large capitalization stocks, has a Morningstar rating of 4, and has beaten both the S&P 500 index and the average domestic equity fund over the last three and five years. If you wanted a broader portfolio, this would be a good equity addition. Its expense ratio is a modest 0.51 percent.


• Van Kampen Income (ticker: VIN), selling at a 14.1 percent discount to net asset value, is another 5 star fund that invests in intermediate bonds. Its current yield is about 9.70 percent.
  
  Invest equal amounts in all four funds and your annual interest and dividend yield will be about 5.0 percent--- attractively higher than the 3.8 percent yield you'd get from comparable open-end funds.

Since many of the closed end equity funds have large unrealized capital gains, prudent investors might want to limit the use of these funds to tax deferred accounts.

Can you make investments like this all the time? Yes, but sometimes are more attractive than others. This is one of those times.