Closed-end Funds

Closed-end funds issue a fixed number of shares that are negotiated in the stock markets or in the OTC market. When shares are sold the fund issues more shares.

At the end of 2004 there were 620 closed-end funds that consist in 463 bond funds and 157 stock funds. These funds have professional managers that build and manage investment portfolios according to what funds deem convenient.

On the contrary open-end funds closed-end funds do not negotiate with their NAVs. In change, share prices are based on supply and demand by funds and some other fundamental factors. Consequently closed-end funds can be negotiated at premiums or discounts to their NAVs.

Prices of closed-end funds could be obtained in financial newspapers or websites in the internet. Closed-end fund shares are bought and sold through brokers.

You should be informed of the following items about buying closed-end funds:

  • Brokerage firms underwrite and sell newly issued shares of closed-end funds
  • Brokerage fees on these newly issued shares can be very high , what  corrodes share prices when negotiated in the market.
  • For instance, if closed-end funds sell one million shares at $10 share and there is a 7% brokerage commission the fund is receiving $p.3 millions to invest ($700,000 are deduced from the $10 million income). The share price drops to its original $10 per share and they are negotiated with a discount over the offered price.
  • Another reason why one should not buy newly issued shares in a closed-end funds is that the investment portfolio has not been yet constituted therefore investors do not know which are the investment assets and in the case of bond funds the yields on those investments.