Are You Up to Date on Closed-End Funds?

Closed-End Funds can spell success for your clients
Closed-End Funds can spell success for your clients

Closed-end funds offer client privileges but are often underutilized because many investment advisors do not understand the product.
The unique structure of closed-end funds—a set pool of shares, may offer investors a steady stream of income, perhaps steadier than other investments…yet only about half of financial advisors have implemented their use in client portfolios. Many times closed-end funds provide one of the most efficient investments for growing (and sustaining) income—something especially important for retirees.
To take advantage of the many benefits that closed-end funds may provide, it’s crucial to understand the process behind the product itself. A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through their IPO. The fund then is structured, listed, and traded as if it were a stock in exchange. This is also commonly known as two other things—a ‘closed-end investment’ or the ‘closed-end mutual fund.’
Also, it’s important to note that despite similarities in the name of the products that closed-end funds have little in common with conventional mutual funds—which is technically an open-end fund. Closed-end funds raise a prescribed amount of capital one time through an IPO. They do this by issuing a fixed number of shares, which are then purchased by investors involved in the closed-end fund as stock. However, unlike regular stocks, closed-end funds represent an interest into a specific, specialized portfolio of securities that is actively managed by an investment advisor. These funds tend to concentrate on specifics—industry, geographic market, or sector. These prices fluctuate according to supply and demand, as well as changing values of securities in the fund’s holdings.
75% of closed-end funds involve, at the very least, a modest amount of leveraging. The asset management firm offering the funds borrows against shares issued and the investors that buy-in reaps the return from borrowed money—subtracting the cost of borrowing. There are also national, state, and municipal closed-end funds that offer investors tax advantages. These funds can also provide access to alternative asset classes to help investors with the diversification of their portfolio.