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FAQs

Is a closed-end fund "closed" to new investors?

There is often confusion between closed-end funds and open-end funds that are "closed." CEFs have fixed amounts of capital and shares but are open to new investors through customary securities trading procedures. Conversely, open-end funds that are "closed" do not allow new investors into a fund.



How many stocks might an equity closed-end fund own?

The number can range from a few stocks up to hundreds, depending on the quantity of assets and the diversification or concentration of the portfolio holdings to. Funds which hold 30 or fewer stocks are sometimes called "focus funds," because they seek to generate superior performance from their very best stock selections. While such a strategy can be rewarding for investors at times, it also may involve greater risk than investing in a portfolio which is diversified among one hundreds or more stocks.



Can a closed-end fund "go broke?"

It is very unlikely. Keep in mind that the fund is an investment company that is prohibited by law from engaging in active business enterprise, other than of an investment nature. The fund can't go broke because it moves into an unproductive line of business, or if all its markets and customers disappear. Assuming the fund's fiduciaries do their job in safeguarding assets, the only way a closed-end fund can go broke would be for all its portfolio holdings to become worthless, an extremely remote possibility.



Can you make money buying closed-end fund shares by purchasing when discounts are "deep" and then selling when discounts narrow?

Perhaps. But short-term trading of these shares can be very risky. For starters, your commissions will reduce any returns you earn. Also, the factors which produce discounts in closed-end fund shares can take time to change. You may find that you bought a fund for the wrong reason--because it sells at a deep discount--rather than because it meets your investment objective.



For investing in a highly specialized industry or global region, wouldn't a mutual fund offer greater diversification and therefore less risk than a closed-end fund?

Probably not. The mutual fund and closed-end fund may be managed in much the same manner when markets are normal. The advantage can swing to closed-end funds, however, when specialized markets go through rough times. If securities prices decline, fund investors may want out. In closed-end funds, an investor flight can cause the price of shares to decline, but it won't have an impact on the portfolio manager's strategy. The manager can ride out the downturn without selling portfolio securities, if he or she chooses. In mutual funds, however, this isn't always possible. The manager may be forced to sell securities in falling markets to meet redemption demand, and those sales could put additional downward pressure on market prices.



What is a rights offering?

This is a plan through which current shareholders of the fund are given the "right" to purchase additional shares in proportion to their current holdings, at a stated price. The offering price is often below the market price (and NAV) which is an inducement for shareholders to exercise their rights. However, this can also result in dilution of the fund's NAV. It is one way that an established fund may increase the amount of capital at work in the fund, since the shares purchased in a rights offering are newly issued. Shareholders who take advantage of the offering by exercising their rights will maintain their percentage ownership in the fund (the ratio of shares they own to all shares available). In addition, in a transferrable rights offering, shareholders have the opportunity to benefit from the sale of their rights.



What is an automatic dividend reinvestment plan?

This is a plan through which all income dividends or capital gains distributions issued by the fund, or both, are automatically reinvested in new shares. In some closed-end funds, this is the "default" choice, which goes into effect unless the shareholder specifically notifies the fund that dividends are to be paid in cash.


About the Closed-End Fund Association

The Closed-End Fund Association, Inc. (CEFA) is the national trade association representing the closed-end fund industry. The members of CEFA are among the leading investment companies in the United States and Canada, with proud reputations for their long-term service to shareholders. Together, CEFA and its members are committed to fostering awareness, understanding and responsiveness in serving the needs of millions of individual investors who use closed-end funds as core investments to reach their long-term investment goals.



Resources

Aberdeen Closed-End TV

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