Closed-End Funds

Closed-End
Funds

A Closed-End Fund (CEF) is a type of collective investment fund. A CEF has an asset manager who invests a portfolio of investments in order to meet the fund’s investment objectives.

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Closed-End Funds

In the investment world, 1893 marked a pioneering era with the birth of Closed-End Funds, well before the formation of the first Mutual Fund in the United States more than three decades later. These distinctive investment vehicles offer a truly unique pathway for investors to realize their long-term financial objectives.

Features

Closed-End Funds (CEFs) are professionally managed investment companies often compared to traditional Open-End Mutual Funds but possess several distinguishing features. CEFs have a fixed number of shares outstanding, which are listed on securities exchanges and bought and sold on the open market. Transactions in CEF shares are based on their market price, determined by a bid and ask. In contrast, transactions in shares of open-end mutual funds are based on their Net Asset Value (NAV), determined at the close of each business day. Notably, the price of a CEF may be above (trading at a premium to) or below (trading at a discount to) its NAV. Investors have the opportunity to enhance their return on investment by making purchases at a discount.

Advantages

CLOSED-END FUND ADVANTAGES

  • Opportunity to purchase at a discount: investors can purchase additional shares in the market and put more than a dollar of net assets to work for every dollar invested. This means investors can often buy a dollar’s worth of securities for perhaps 85 cents or less.
  • Discount may narrow over time: if during the holding period the discount narrows, the reduction in the discount gives a boost to the fund’s performance.
  • Managed Distribution Plans: Guaranteed annual payout.
  • Higher Distribution Yield: the discount advantage can continue to reward investors for many years as the rate of income will be higher for a CEF at a discount versus an identical mutual fund at NAV.
  • Efficient Portfolio Management: Closed-End Funds managers are responsible for a stable pool of capital, unlike Mutual Fund managers who must worry about constant inflows and outflows of cash. 
  • Inefficient/Underfollowed asset class
  • Ability to Control Market Price and Timing: Closed-End Fund orders can be placed throughout the trading day, and limit prices can be specified.
  • Rights Offerings/Tender Offers: Capital can be increased through the issuance of shares in conjunction with a rights offering. Capital can be reduced when shares of the fund are repurchased in conjunction with a tender offer.

BLUE BELL PRIVATE WEALTH MANAGEMENT ADVANTAGES

  • We recommend purchasing a Closed-End Fund (CEF) only when it is trading at a greater relative discount to its Net Asset Value (NAV), which means buying it at a discount compared to its historical average.
  • Why pay a PREMIUM when there are many Closed-End Funds available at a DISCOUNT?
  • Never purchase a CEF as a new issue. We follow this rule because when you buy a CEF at its IPO, you’re paying the offering price, which will be a premium to the NAV. In most cases, the fund will underperform its NAV and eventually trade at a discount. “Patience is a virtue.”

Benefits

Closed-End Funds offer many benefits to investors.

  • Income or Cash Flow
  • Active Portfolio Management
  • Asset Structure
  • Leverage for Potential Higher Returns and Distributions
  • Market Pricing, Trading Liquidity and Flexibility
  • Expenses

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