Case for closed-end funds not open and shut

Closed-end funds offer an alternative to traditional fund investing. One big difference is price. Even the best closed-end funds usually trade at a discount to their underlying asset value.

Closed-end funds offer advantages to investors with patience. Their key difference from open-end funds is their price. When you buy or sell a closed-end fund, you pay or receive what the market thinks the shares are worth. That might be more than their net asset value (in which case the fund shares trade at a “premium”), or less (they trade at a “discount”).

It’s this difference that can pay off for investors. By restricting purchases to the times when a closed-end fund trades at a deep discount, you buy assets for less than they’re worth. In Canada, closed-end funds often have low share turnover. That means you may have to be patient in acquiring shares. You should also plan to hold such funds a long time.

Buying and selling closed-end fund shares is as easy as buying or selling a stock. Most closed-end fund shares trade on recognized stock exchanges. This means your transaction cost is the same as the commissions your broker charges for any other share. This can be another advantage of investing in a closed-end fund.

Never buy them as a new issue

We advise as a blanket rule never to buy a closed-end fund as a new issue. That’s because the fund must pay underwriting fees, promotional fees, legal fees, sales fees and so on. This means that when new closed-end funds sell their shares, it’s always for more than their net asset value. After the launching of the fund, the share price almost always drops below net asset value. Wait until that happens before buying.

Closed-end funds in Canada (there are over 100) range from Canadian General Investments which holds a diversified Canadian stock portfolio, to specialized funds such as Central Fund of Canada, which specializes in gold and silver, and First Asset Canadian REIT Income Fund, which invests in real estate investment trusts.

A diversified fund with a long history

Canadian General Investments Ltd. (TSX─CGI) is among the best Canadian closed-end funds. Going since 1930, the fund focuses on medium- to long-term capital appreciation and dividends in Canadian corporations. Over the 25 years ended Dec. 31, 2014, its compound annual growth rate was 10.7 per cent versus 8.0-per-cent for the S&P/TSX composite index. Canadian General Investments is a long-term buy if you want growth from a closed-end fund and can tolerate medium to higher investment risk.

In the U.S., there are more than 600 closed-end funds, most of which trade on the New York Stock Exchange. These include everything from foreign equity funds to more specialized offerings. Several general equity funds have been in existence for many decades, including Tri-Continental Corp. and Adams Express. The foreign equity funds represent most developed, as well as developing countries.

Currently, most closed-end funds in Canada and the U.S. trade at a discount to their net asset value. Such discounts normally range all the way down to 30 per cent. When emerging stock markets have performed well, some closed-end funds that invest in them have traded at ten to 25 per cent premiums over net asset value. This means prices of closed-end funds vary a lot more than their net asset values.

Because even the best closed-end funds usually trade at a discount, you should time your sales for periods when the discount is small—or the fund is perhaps at a premium. In any event, you should invest in a closed-end fund only for the long term. 


The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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