Closed-end funds have become popular as a way to access a wide range of asset classes and investment strategies, with the potential to generate high levels of income. Cohen & Steers is one of the largest domestic investors in closed-end funds and offers this Knowledge Center as a resource for learning about the closed-end fund market and staying informed about your investments.
- Learn the basics about closed-end funds
- Discover more through industry group: Closed-End Fund Association (CEFA)
What is a closed-end mutual fund?
A closed-end fund is an investment company that issues a fixed number of shares through an initial public offering (IPO). The assets of the fund (a portfolio of securities) are professionally managed. After the IPO, closed-end fund shares trade in the secondary market, either on an exchange or on the over-the-counter market, much like a stock. The trading price of the fund’s shares is determined by its market price, not by the fund’s net asset value (NAV).
What is the difference between a closed-end mutual fund and an open-end mutual fund?
Open-end funds continuously sell and redeem shares for investors. Closed-end funds sell a fixed number of shares once, in an initial public offering. Closed-end fund shares cannot be redeemed directly, and are only sold in a secondary market, typically the American Stock Exchange, New York Stock Exchange or the Nasdaq. Open-end fund share prices are determined by the fund’s net asset value (NAV), which is calculated at the end of each business day. Closed-end fund share prices fluctuate throughout the day, as they are driven by market price, which is determined by supply and demand.
What is the difference between a closed-end mutual fund and an open-end mutual fund that is “closed”?
Closed-end mutual funds issue a fixed number of shares, which are bought and sold on a stock exchange or market. When an open-end mutual fund is “closed”, this means the fund is no longer allowing new investors into the fund.
What is the difference between net asset value (NAV) and the market price of closed-end mutual funds?
Per share net asset value (NAV) is the current value of a fund’s assets, less liabilities, divided by the total shares outstanding. Market price is the price an investor pays or receives when he or she purchases or sells shares of a closed-end mutual fund. Again, this price is determined by supply and demand for the closed-end fund on a stock exchange or market. Both open-end and closed-end mutual funds calculate NAV per share, but only open-end mutual funds allow transactions at the fund’s NAV.
What does it mean when a closed-end mutual fund trades at a discount or premium?
A premium occurs when the market price of a closed-end mutual fund share is more than its net asset value per share (NAV). Conversely, a discount occurs when the market price of a closed-end mutual fund share is less than its NAV per share.
Shares of many closed-end funds frequently trade at a discount from their net asset value. The funds are subject to stock market risk, which is the risk that stock prices overall will decline over short or long periods, adversely affecting the value of an investment in a fund.
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Investors should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. You can obtain the fund’s most recent periodic reports, when available, and other regulatory filings by contacting your financial professional or visiting cohenandsteers.com. These reports and other filings can also be found on the Securities and Exchange Commission’s EDGAR Database. You should read these reports and other filings carefully before investing.
Data quoted represents past performance, which is no guarantee of future results. The information presented does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected.
This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or take into account the specific objectives or circumstances of any investor. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing.
Risks of Investing in Global Infrastructure Securities
Since the fund concentrates its assets in global infrastructure securities, the fund will be more susceptible to adverse economic or regulatory occurrences affecting global infrastructure companies than an investment company that is not primarily invested in global infrastructure companies. Infrastructure issuers may be subject to regulation by various governmental authorities and may also be affected by governmental regulation of rates charged to customers, operational or other mishaps, tariffs and changes in tax laws, regulatory policies and accounting standards. Foreign securities involve special risks, including currency fluctuation and lower liquidity. Some global securities may represent small and medium-sized companies, which may be more susceptible to price volatility than larger companies. No representation or warranty is made as to the efficacy of any particular strategy or fund or the actual returns that may be achieved.
Risks of Investing in MLP Securities
An investment in MLPs involves risks that differ from a similar investment in equity securities, such as common stock of a corporation. Holders of equity securities issued by MLPs have the rights typically afforded to limited partners in a limited partnership. As compared to common shareholders of a corporation, holders of such equity securities have more limited control and limited rights to vote on matters affecting the partnership. There are certain tax risks associated with an investment in equity MLP units. Additionally, conflicts of interest may exist among common unit holders, subordinated unit holders and the general partner or managing member of an MLP; for example a conflict may arise as a result of incentive distribution payments.
MLPs are subject to significant regulation and may be adversely affected by changes in the regulatory environment including the risk that an MLP could lose its tax status as a partnership. MLPs may trade less frequently than larger companies due to their small capitalizations which may result in erratic price movement or difficulty in buying or selling. MLPs may have additional expenses, as some MLPs pay incentive distribution fees to their general partners. The value of MLPs depends largely on the MLPs being treated as partnerships for U.S. federal income tax purposes. If MLPs were subject to U.S. federal income taxation, distributions generally would be taxed as dividend income. As a result, after-tax returns could be reduced, which could cause a decline in the value of MLPs. If MLPs are unable to maintain partnership status because of tax law changes, the MLPs would be taxed as corporation and there could be decrease in the value of the MLP securities.
Risks of Investing in Closed-End Funds
Risks associated with investing in closed-end end funds generally include market risk, leverage risk, risk of anti-takeover provisions and non-diversification. In addition, shares of many closed-end funds frequently trade at a discount from their net asset value.