Investors and their advisors are bombarded with investment ideas today. Advice appears everywhere—from Amazon to Yelp, Facebook to Fox and LinkedIn to NPR.
Despite all the “noise,” one investment idea continues to hold its position as an important component of investors’ strategies. It’s an investment product that has been around for more 150 years: closed-end funds.
Closed-end funds are professionally managed “investment companies” that may invest in a range of securities. Closed-end funds are called “closed” because they generally issue fixed numbers of shares through initial public offerings. After that, closed-end funds trade like stocks on recognized exchanges just like any other publicly listed and traded security.
Closed-end funds have endured because they continue to deliver compelling features to investors.
According to Scot Shier, founder and president of Quintessential Financial, an investment advisory firm in Mission Viejo, Calif., “Closed-end funds may not possess the same ‘household name’ as other investment products but they are a terrific way to deliver income and yield. I take the time to explain their structure to clients and it’s an exercise well worth the time. Clients recognize that closed-end funds have potential advantages that make their use very understandable.”
Aberdeen’s third annual survey of financial advisors found that while advisors are increasingly recommending closed-end funds, a major roadblock is a lack of investor understanding. In fact, 70 percent of advisors surveyed cited a product knowledge deficit as the primary deterrent to the use of closed-end funds.
Here are ten reasons to consider closed-end funds:
- Closed capital structure. Their permanent asset bases make closed-end funds well-suited to investing in potentially thinly traded markets—such as many emerging markets. The closed structure relates closely to ...
- No forced selling. The closed structure limits the need to sell securities at unattractive prices to meet redemption requests. This is important not only in thinly traded markets but also in volatile or falling markets.
- No cash drag. Because of their closed structure, portfolio managers can remain fully invested at all times. This is especially important for closed-end funds designed to generate income.
- Intelligent borrowing. Closed-end funds’ ability to use leverage can potentially enhance performance after all expenses, especially with the cost of borrowing currently near historic lows. The use of leverage also has the potential to enhance yield by delivering additional income.
- Market impact. Because closed-end funds aren’t forced sellers, investor activity has no impact on the underlying fund assets.
- Expenses. The average expense ratio of all actively managed back-end load / level load open-end mutual funds is 1.78%, while the average expense ratio of all closed-end funds is 1.30%.
- Active management. When you buy shares in a closed-end fund, you are buying the knowledge and experience of portfolio managers who actively research and select securities; you aren’t simply buying a basket of securities replicating an index.
- Discounted purchases. Investors often have the ability to purchase closed-end funds at discounts to their net asset values. Buying at a discount may lead to capital appreciation if the discount narrows.
- Exchange-traded liquidity. Closed-end fund shares trade on recognized exchanges, which help provide liquidity and are a convenient way to track prices under their assigned “ticker” symbols.
- Suitability. Closed-end funds may be suitable for a range of accounts, including retirement savings, trusts and general investment accounts. Most closed-end funds do not impose a minimum on purchases, which helps make them an option for many different investment strategies.
For more information on the ten reasons to consider closed-end funds, please see Aberdeen’s report “Closed-End Funds: Easily Explained”.
 Leverage can potentially magnify investment losses.
 Source: Lipper, June 2013. Total expense ratios for funds include any estimated underlying fund expenses from each fund’s most recent prospectus.
Closed-end funds are traded on the secondary market through one of the stock exchanges. The Fund’s investment return and principal value will fluctuate so that an investor’s shares may be worth more or less than the original cost. Shares of closed-end funds may trade above (a premium) or below (a discount) the net asset value (NAV) of the fund’s portfolio. There is no assurance that the Fund will achieve its investment objective. Past performance does not guarantee future results.
Aberdeen Asset Management is the marketing name in the U.S. for the following affiliated, registered investment advisers: Aberdeen Asset Management Inc., Aberdeen Asset Managers Ltd, Aberdeen Asset Management Ltd and Aberdeen Asset Management Asia Ltd, each of which is wholly owned by Aberdeen Asset Management PLC. “Aberdeen” is a U.S. registered service mark of Aberdeen Asset Management PLC.
Closed-end funds are traded on the secondary market through one of the stock exchanges. The Fund’s investment return and principal value will fluctuate so that an investor’s shares may be worth more or less than the original cost. Shares of closed-end funds may trade above (a premium) or below (a discount) the net asset value (NAV) of the fund’s portfolio. There is no assurance that the Fund will achieve its investment objective. Past performance does not guarantee future results. Funds can potentially receive dividends from investment. Equity market volatility can lead to a fall in the value of the investment. Active management can potentially lead to outperformance or underperformance relative to the benchmark.
Diversification does not necessarily guarantee a profit or protect against a loss.
International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments.
Derivatives are speculative and may hurt the Fund’s performance. They present the risk of disproportionately increased losses and/or reduced gains when the financial asset or measure to which the derivative is linked changes in unexpected ways. Diversification does not ensure a profit or protect against a loss.
This article does not provide financial or investment advice and does not take into account the particular financial circumstances of individual investors. Before investing, investors should seek their own professional advice.
Aberdeen Asset Management (AAM) is the marketing name in the U.S. for the following affiliated, registered investment advisers: Aberdeen Asset Management Inc., Aberdeen Asset Managers Ltd, Aberdeen Asset Management Ltd and Aberdeen Asset Management Asia Ltd, each of which is wholly owned by Aberdeen Asset Management PLC. “Aberdeen” is a U.S. registered service mark of Aberdeen Asset Management PLC.
Aberdeen Asset Management Inc.
1735 Market Street, 32nd Floor
Philadelphia, PA 19103
Tel: (215) 405 5700
Alison DuPont is a senior marketing manager responsible for creating and delivering marketing strategies for Aberdeen Asset Management’s U.S. closed-end fund complex.