A Special BargainKen Bingham likes bargains. We’re talking simple bargains here, not tortured cases of “undervaluation.” Show him an opportunity to buy $1 for 85 cents and you’ve got his attention.

In fact, that’s how he manages a good slug of his retirement money. Bingham, a friend and retired stockbroker, will happily tell you that he doesn’t go to the office anymore. Indeed, he hasn’t gone back since the day he retired. When we spoke on the phone, he was calling from a lakeside cottage and entertaining his grandchildren.

And he wasn’t wringing his hands with worry. For him, the current market is unusually full of the bargains he likes.

So how does he find these bargains?

He buys closed-end funds, a little-known investment sideshow. “It’s an area I’ve been interested in since 1970. And now I keep a balanced portfolio in closed-end funds,” he told me. In case you’ve never heard of closed-end funds, you can think of them as the original ETFs. Rather than having the fund management company issue and redeem shares at net asset value, as open-end funds do, closed-end funds are sold in a public offering. The fund then trades on an exchange, like a stock. These funds frequently sell at a discount to the value of the underlying portfolio because they get little attention from Wall Street once they are launched.

“It’s still an area most people don’t understand-- at all. Those who own them probably bought most of them new, at issue, when they had some promotion. And after a month (from the original offering), there is unusually heavy volume as people sell their shares.

“They have (brokerage) sponsorship when they come public and that’s it. After that, well, it’s a market that’s too small for the big boys. Let me put it in some perspective. According to Morningstar, there are 983 closed-end funds with an average market capitalization of $263 million. So the entire market is about $258 billion. That’s a little more than the value of Wal-Mart but less than the value of ExxonMobil. That’s a big chunk of money in a single stock, but it doesn’t offer much opportunity for big trades when it’s spread over nearly a thousand funds.” That, Mr. Bingham believes, is why most closed-end funds regularly sell at a discount to net asset value.

And how much time does he spend doing it?

Not much. Once a year he checks the discounts on the funds. When appropriate, he sells one and replaces it with another. It’s appropriate to sell when a fund no longer sells at a significant discount to the underlying net asset value per share and can be replaced by a similar fund selling at a larger discount.

Then he goes back to entertaining his grandchildren.

In his balanced portfolio, Mr. Bingham has a group of closed-end equity funds that accounts for 60 percent of the portfolio and a group of closed-end bond funds that accounts for the remaining 40 percent. One fund he particularly likes is Central Securities (ticker: CET). One of the oldest closed-end (or open-end) funds, it was formed in 1929 and has an annual expense ratio of only 0.59 percent—well below average. Specializing in mid-cap stocks, the fund has sold at a discount over 15 percent in recent months, according to Morningstar. That’s a greater discount than in recent years.

He also likes Swiss Helvetica (ticker: SWZ), a closed-end fund that invests in European stocks. With an annual expense ratio of 1.1 percent, the fund was recently selling at a discount of 21 percent—that’s nearly double the discount the fund has sold at in recent years.

Is his method dirt-simple? No.

“If I see an extreme discount, I tend to ask why,” he says. Often there is a reason.

The advantage comes from being patient and letting the discount work for you, adding to your return as it goes from 10 percent to 5 percent or 20 percent to 10 percent—in addition to the return on the underlying portfolio. Indeed, those who invested late last year, when closed-end funds were selling at extreme discounts, have already done well for modest effort.

On the web:

Buy Closed-End funds at a discount

Dangerous Advice from Peter Lynch

Closed End Fund Association

ETF Connect