Closed End Fund
A Closed End Fund is a type of mutual fund that issues a fixed number of shares through one initial public offering to raise capital for its initial investments. CEFs are professionally managed portfolios that can offer a convenient way to access a diversified pool of investments. They are available across a wide range of investment categories including equities, taxable fixed income, and tax-free fixed income. CEFs offer the opportunity to seek attractive yields and capital appreciation in a professionally managed investment vehicle. CEFs are listed on a stock exchange where the shares trade like stocks throughout the trading day. Shares are primarily traded on the New York Stock Exchange (NYSE), NASDAQ and the American Stock Exchange (AMEX).
MORE ABOUT CEFs
Closed-end funds (CEFs) are one of four main types of investment companies, along with mutual funds, exchange-traded funds, and unit investment trusts.
Like many mutual funds, a closed-end fund has a manager overseeing the portfolio and actively buying, selling, and holding assets.
CEFs are usually actively managed, unlike index mutual funds and many ETFs, and typically concentrate on a single industry, sector, or region.
Shares trade on a stock exchange, offering daily liquidity at the current market price of those shares, as opposed to the value of the underlying investments.
CLOSED END FUNDS & NAVS
The Net Asset Value of the fund is calculated regularly and based on the value of the assets in the fund.
A closed-end fund can trade at a premium or a discount to its NAV. A premium price means the price of a share is above the NAV, while a discount is the opposite, below the NAV.
Understanding NAV and how CEFs trade relative to it is key for evaluating valuation, opportunity, and risk in closed-end fund investing.
CLOSED VS OPEN END FUNDS
Unlike open-end funds, also known as mutual funds, whose shares are purchased and sold at their underlying net asset value, closed-end fund shares are either purchased or sold at their prevailing market price.
An open-end mutual fund issues new shares whenever an investor chooses to buy into it and repurchases them when they're available. A closed-end fund issues shares only once.
Closed-end funds also tend to use leverage, or borrowed money, to boost their returns to investors, meaning higher potential rewards in good times and higher potential risks in bad times.
FEATURES OF CEFs
Income Generation.
Most CEFs seek to distribute income to shareholders on a monthly or quarterly basis by pursuing strategies intended to produce consistent yields.
Professional Management.
CEFs are actively managed by investment professionals and offer access to institutional-quality managers and strategies.
Flexible Structure.
CEFs may employ leverage through lines of credit, debt, preferred shares, derivatives, and/or securities with embedded leverage. They may also invest in less liquid alternative assets.
Automatic Dividend Reinvestment.
Investors usually have the option to reinvest CEF dividends into additional CEF shares on an ongoing basis, which offers the advantage of potentially compounding investment returns.
Real-Time Trading.
CEFs are typically listed on an exchange, allowing you to purchase shares throughout the trading day at market price, which will fluctuate.
Stable Asset Base.
CEFs have a generally stable asset base that allows the portfolio manager to implement the fund’s investment strategy without having to manage inflows or redemption requests.