BEA ASSOCIATES LEADS WAY IN SELLING CLOSED-END FUNDS RIGHT TO INVESTORS: USES BANK-OWNED FIRM TO PEDDLE ITS WARES

Direct purchase plans, once available only for individual stocks, have quietly entered the closed-end fund arena.

Boston EquiServe, the dominant closed-end fund transfer agent, since June has been brokering shares in international portfolios managed by a client, New York-based BEA Associates.

EquiServe, a limited partnership involving two Boston banks and a processor of mutual fund transactions, also provides transfer services for more than 200 other funds that encompass more than 40% of the $106 billion closed-end market.

With the move, BEA has tapped into the direct-purchase movement that has become popular with U.S. investors — particularly smaller ones. Most of the largest U.S. corporations have programs allowing stockholders to buy shares directly from and sell them to the issuers, often at a lower cost than discount brokers offer.

The EquiServe program requires a minimum initial investment of $250, and investors can make subsequent trades with as little as $100.

Until now, direct purchase plans have been confined largely to individual stocks.

The five BEA portfolios — the Brazilian Equity, Emerging Markets Infrastructure, Emerging Markets Telecommunications, First Israel and Indonesia funds — appear to be the first closed-end mutual funds to adopt similar programs.

trade like stocks

Unlike open-end mutual funds, which investors buy and sell at net asset values figured at the end of each trading day, closed-end funds are sold in an initial offering and then traded on an exchange like individual stocks. Their prices typically are at a discount or premium to their net asset values.

EquiServe has offered to make available on its trading platform other closed-end funds for which it keeps shareholder and transaction data, but thus far has found no takers, says Nicole Mitchell, account manager for its closed-end fund division.

BEA may offer four more funds directly, but has made no decision, she says.

Ms. Mitchell acknowledges that assets haven’t been pouring in through this direct channel, blaming a lack of awareness on the part of investors.

The Securities and Exchange Commission places tight marketing restrictions on direct-investment plans offered by bank-affiliated companies like EquiServe — a partnership involving BankBoston Corp. and a joint venture between State Street Corp. and DST Systems Inc. of Kansas City, Mo. In essence, the only exposure the program gets is through the company’s Web site, Ms. Mitchell says.

In addition, fund managers seem reluctant to pay to be listed on an unproven distribution system, she says.

“I think this type of program has potential,” she says. “I think shareholders are looking for more convenient and cheaper means of investing in the market.”

So how much of a secret is EquiServe’s program? Even George Cole Scott, a Richmond, Va., investment adviser specializing in closed-end funds, wasn’t aware of its existence. Mr. Scott uses Charles Schwab & Co. to clear his closed-end fund trades, but says he’d consider a direct-purchase service like Boston EquiServe’s at the right price.

$5 a trade

EquiServe charges $10 for initial purchases of stock or mutual funds and $5 for additional buys. All purchases also are subject to a per-share charge of 8 cents. On sales, it charges $10, plus 15 cents a share. It also offers investors automatic withdrawal from their bank accounts.

For Mr. Scott, those prices aren’t enticing, since he’s paying about 8 cents a share with Schwab without the flat fee.

But for individual investors, particularly those investing small amounts, that price is cheap, says Charles Carlson, editor of the DRIP (Dividend Reinvestment Plan) Investor newsletter in Hammond, Ind., which recently featured Boston EquiServe’s program.

“The second benefit is that in these programs you’re dealing in dollar amounts and not (whole) share amounts,” he says.

That makes it easier for a small investor, who might have only $100 or $200 to invest after budgeting the month’s expenses.