Closed-end Funds

Closed-end Funds 2017-02-07T21:29:48+00:00


An Overlooked Opportunity for Substantial Gain

Long overlooked and poorly understood by most investment managers, closed-end funds provide substantial opportunities to generate strong investment returns. KIM is one of the United States’ largest and most experienced investors in closed-end funds.

Learn more about this little understood but important investment vehicle:

What is a closed-end fund?

A closed-end fund is a type of fund that has a fixed number of shares. The funds are created by investment companies through initial public offerings and typically trade, like stocks, on major exchanges. Closed-end funds tend to hold specialized portfolios of stocks, bonds, convertible securities or combinations of these. They might aim to produce income, capital gains or some combination of the two. Unlike the more common open-end mutual funds, closed-end funds do not issue and redeem shares continuously.

What are the advantages of closed-end funds?

Because closed-end funds do not issue and redeem shares after their initial public offering, they deliver several advantages: They do not charge the 12b-1 fees that many open-end funds charge to pay marketing expenses. They do not charge sales load fees. They are not forced to sell attractive investments or hold cash reserves to finance redemption requests. Most important, closed-end funds often trade at discounts to their net asset value (NAV). This can be like buying a dollar for 80 cents.

What does net asset value mean?

NAV refers to the book value of a security. The formula for calculating NAV is total assets minus total liabilities divided by shares outstanding. This reveals the current worth of a share in the closed-end fund.

Why do closed end funds trade at a discount?

Like stocks, closed-end funds are traded on exchanges where price is determined by supply and demand. When demand exceeds supply, shares in a closed-end fund might trade at a premium to (more than) their net asset value. However, with closed-end funds, supply often exceeds demand. Therefore, shares typically trade at discounts to (less than) their NAV. These discounts historically have reached 15% to 20%.

How do investors profit from closed-end funds?

It takes solid understanding of the closed-end fund market to purchase shares when they are trading at attractive discounts and sell them at a profit when discounts narrow. Karpus Investment Management has been a major investor in closed-end funds for more than 15 years. In addition to following this market closely, KIM engages in shareholder enhancement to maximize investment returns.

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