The Anatomy of a Closed-End Fund
Anatomy of a closed-end fund
When looking for ways to invest internationally, the amount of choices can be daunting. Closed-end funds can be an efficient way to gain exposure to international regions.
Because closed-end funds issue a fixed number of shares, closed-end fund managers have a stable pool of capital to use when investing for the long term. With a stable level of assets to work with, closed-end funds can remain fully invested in less liquid markets over market cycles.
Another appealing feature of closed-end funds is their ability to trade either at a premium or a discount to net asset value (NAV) or their underlying portfolio. If trading at a discount, investors can buy shares at a lower price while granting them access to international investments and actively managed strategies.
If trading at a discount, investors can buy shares at a lower price while granting them access to international investments and actively managed strategies.
Premiums and discounts tend to vary throughout the year (see Figure 3) because prices are established by the competitive markets. This reflects buying demand and selling supply of shares as it exists in real-time in the real world. These variations in price are influenced by investor perceptions, fears and needs for specific types of investments, among other factors, according to the Closed-end Fund Association.
The world we live in today is complex, but investing internationally doesn’t have to be.
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1“Global equities: Balancing home bias and diversification.” Vanguard, February 2014.
2Aberdeen Asset Management survey of more than 100 financial advisors and investors at a closed-end fund conference, October 12, 2015.