Although no investment vehicle is perfect, I find much to like in closed-end funds.

Federal Reserve Flow of Funds Table F.123 shows the big picture for this category of investment. Depending upon the market, new issues of closed-end funds focus on bonds or equities. However, unlike open-end funds, closed-end funds tend to persist after market fads pass and a wide variety of closed-end funds are traded on the exchanges, suitable for almost any asset-allocation need.

The Closed-End Fund Association maintains a website that offers a wealth of free information about this type of investment. Here you find educational resources, plus up-to-date statistics from Thomson Financial.

The Closed-End Fund Association website also offers a portfolio tracker that caters to the needs of closed-end fund fans, with updated net asset values, trading discounts, and dividend yields.

Advantages of Closed-End Funds

I  like closed-end funds because:

1. A variety of funds are available, meeting almost every investment need.
2. Many funds are managed by highly qualified professionals. Often the funds serve as a showcase or calling card for top investment managers that deal primarily with large private and institutional clients. This makes it easy to build a highly diversified portfolio, managed at reasonable cost by a diversified group of qualified professionals.
3. Most funds are moderately leveraged, which in the case of bond funds helps to neutralize administrative costs. Many funds hedge positions against sudden market swings that might impair investment objectives.
4. Many funds trade for a discount from net asset value on the exchange, which is never the case with open-end funds.
5. When funds are bought through a broker, at today’s cut rates, the costs of acquisition and disposal can be nominal, compared to sales fees on open-end funds, which are often concealed.
6. Most funds pay dividends monthly. Usually, management permits investors to automatically reinvest dividends at net asset value or market, whichever is lower. Over time, reinvesting at a discount can improve returns substantially.
7. Compared to open-end funds, closed-end funds are the ugly-ducklings of the collective investment market. Brokers don’t like them because commissions are less than the sales fees on open-end funds.
8. Closed-end funds are usually small, often less than $100 million dollars. This means that most brokerage research departments don’t follow this segment of the market. However, because these funds are transparent and relatively easy to understand, reporting frequently to shareholders, brokers’ opinions are not that useful or necessary.
9. Closed-end funds are better suited for long-term investment than open-end funds because fund managers can maintain a consistent long-term policy. Unlike open-end funds, managers do not need to maintain liquid positions for sudden withdrawals or to worry about being forced to acquire unwanted capital gains tax liabilities due to the flow of money in and out of the funds. Closed-end funds are not limited in portfolio selection by liquidity requirements as is the case with large open-end funds.
10. Because of thin markets, most closed-end funds fluctuate at a premium or discount from net asset value, which affords a modest opportunity to enhance returns.

You can find more about closed-end funds on the association website.

This entry was posted on Thursday, February 2nd, 2006 at 2:13 pm and is filed under Fund Managers. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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