A Look at Closed End Funds (CEF’s)

(information obtained from cefconnect.com)

Currently my portfolio is out of balance due to selling some positions in profit during a high level of the S&P and expecting a pull back soon.  So my dividend portion of my portfolio is out of balance.  I am looking to have cash available to enter new positions during the next pullback.  I am reviewing my study of closed end funds because I want to enter a few positions in my income allocation to increase the yield without adding undue risk.

What is a Closed-End Fund?

A closed-end fund is a publicly traded investment company that invests in a variety of securities, such as stocks and bonds. According to the fund's investment objectives, the fund raises capital primarily through an initial public offering (IPO). "Closed" refers to the fact that, once the capital is raised, there are typically no more shares available from the fund sponsor and the issuance of new shares is closed to investors.

After the IPO, most closed-end funds are listed on a national exchange such as the New York Stock Exchange (NYSE) or the NASDAQ. There the fund's shares are purchased and sold in transactions with other investors, not with the sponsor company itself.

The typical closed-end fund strategy represents an actively managed selection of holdings. These investments in securities collectively add up to a value, known as its Net Asset Value (NAV), that may be different from the fund's market price. The market price is determined by market demand and supply, not the fund's net asset value.

Since most closed-end funds offer regular monthly or quarterly distributions, demand is often related to both the distribution amount and the NAV performance of a fund.

Although the outstanding shares of a closed-end fund remain relatively constant, additional shares can be created through secondary offerings, rights offerings or the issuance of shares for dividend reinvestment.

Key Considerations for Closed-End Funds

Closed-end funds are investments designed for income-conscious investors seeking to meet a wide range of investment goals, including:

• The potential to meet current obligations with monthly or quarterly cash flow;
• The potential to achieve attractive, long-term total returns;
• The opportunity to realize greater income portfolio diversification.

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Closed-end fund shares also carry risks investors should understand:

• Closed-end funds trade on exchanges at prices that may be more or less than their NAVs.
• There is no guarantee that an investor can sell shares at a price greater than or equal to the purchase price.
• Closed-end funds often use leverage, which increases a fund's risk or volatility.

There are several characteristics of closed-end funds that can help investors meet their investment goals:

Portfolio Management - The asset base for closed-end funds is relatively stable. Without the pressure of constantly investing or redeeming securities based on investor demands, closed-end funds may be able to take better advantage of a wide variety of investment strategies, including longer-term and less liquid securities or markets.

Distributions - Closed-end funds are generally designed for regular cash flow. Distributions are paid according to a prescribed schedule -- typically monthly or quarterly -- which allows investors to plan the timing of this income. Of course, the actual amount of the distributions may vary with fund performance and market conditions.

Leverage - Closed-end funds often borrow capital or issue preferred shares in order to leverage their portfolios. The goal is to use the additional capital to invest for a return that exceeds the cost of the leverage. Any excess return, or loss, is added to the return on capital raised through common shares. Thus, leverage multiplies both potential return and the volatility of the fund's portfolio. .

Market Pricing - Investors who wish to buy or sell fund shares do not purchase or redeem directly from the fund - rather, they buy or sell fund shares on the stock exchange in a process identical to the purchase or sale of any other listed stock. All the strategies associated with stocks, such as market orders, limit orders, stop orders, short sales, and margin buying can be used in the purchase and sale of closed-end funds.

Trading Liquidity and Flexibility - A stock market listing means that closed-end fund shares may be bought or sold at any time during the trading day, and the price is updated throughout the trading day, not just at the close. Like other investments, share prices will fluctuate with the market, and may be worth more or less at the time of sale than the original purchase price.

Expenses - Closed-end funds typically do not impose annual 12b-1 fees. However, investors must still pay a brokerage commission to purchase and sell shares for all closed-end funds. For those investors who trade frequently, this can significantly increase the cost of investing in closed-end funds. This means closed-end funds may have lower expenses internally, but an investor's total costs may not be lower.

I intend to add a series of posts as I review what I am looking at to analyze the funds and make selections.