Advantages and disadvantages of closed-end funds

Parksville Qualicum Beach business columnist speaks out about investments

Here’s another investment you can’t buy at your local financial corner store: the closed-end fund. It shares many characteristics with its wider-known cousin (the open-ended mutual fund), but with some differences:

Once a closed-end fund has been issued and starts trading on the secondary market you can no longer purchase it through the issuing company. Instead you must find another investor who is willing to sell. And while a healthy secondary market does exist for most closed-end funds, the market is not highly liquid. Often they will trade at prices below their net asset values (NAV).

This is not always a good thing for those who subscribe to initial offerings of closed-end funds. But for patient investors who wait and buy through the secondary market, one person’s loss can be another’s gain.

Closed-end funds can be particularly appealing for income oriented investors, since a lower purchase price means a higher yield. Plus an added bonus: some of them still benefit from income re-characterization: a significant tax advantage that our government has been trying to do away with through recent budget measures. In some cases they have been grandfathered for extended periods.

Some other distinguishing characteristics:

Less cash required. Since closed-end funds do not allow for daily redemptions at the whims of investors, managers do not need to maintain high cash values.

Investment Cash Flows. Successful mutual funds attract new money, as investors have a tendency to chase returns. Often the most successful fund managers find it difficult to continue to do well as they are inundated with cash from new investors. Closed-end funds don’t have this problem, since new investors do not add money to the fund. They simply buy existing units from investors who choose to sell. In fact with closed-end funds success can have the opposite effect, as the funds become more sought after.

No deferred sales charges (DSC). Traditional mutual funds are popular with advisors since they can be sold on a DSC basis, whereby the fund company pays a commission to the advisory firm up front. To recoup the upfront cost, the fund company will penalize investors for early redemptions. Since issuers of closed-end funds are not involved in secondary market trades, there is no need for deferred sales charges.

Jim Grant, CFP, CIM (Chartered Investment Manager) is a financial advisor with Raymond James Ltd (RJL). The views of the author do not necessarily reflect those of RJL. This article is for information only. E-mail: jim.grant@raymondjames.ca

Just Posted

(File photo)
Crime report: Crooks busy pilfering bikes throughout Parksville Qualicum Beach area

Thefts among 295 complaints Oceanside RCMP deal with in one-week period

The Arrowsmith Search and Rescue logo on the back of a service vehicle. (Mandy Moraes photo)
Parksville and Qualicum Beach provide letters of support for Arrowsmith Search and Rescue

ASAR asks for increase in funding, one-time capital grant and for RDN to buy out current facility

The proposed running track upgrade at Ballenas Secondary is now on course. (PQB News file photo)
RDN: Parksville track upgrade project gains some traction

Staff recommends board approve $204,000 funding

The total earnings of Town of Qualicum Beach council and mayor amounted to $186,649 in 2020, including expenses. (Town of Qualicum Beach photo)
Nine Qualicum Beach town employees earned more than $100K in 2020

Mayor and council received earnings totalling $186,649

(PQB News file photo)
Fireworks report highlights enforcement challenges for Regional District of Nanaimo

Director: ‘I just think it’s wasting everybody’s time’

Canadian Prime Minister Justin Trudeau participates in a plenary session at the G7 Summit in Carbis Bay, England on Friday June 11, 2021. THE CANADIAN PRESS/Adrian Wyld
Canada donating 13M surplus COVID-19 vaccine doses to poor countries

Trudeau says the government will pay for 87 million shots to be distributed to poor countries

Gabriola Island artist Sheila Norgate is promoting the Digital Innovation Group’s art impact survey. (File photo)
Vancouver Island artists get behind regional arts impact study

Artists urged to use their stature to help put arts and culture super-region on the map

The BC Ferries website went down for a short while Monday morning following a provincial announcement that recreational travel between health authorities can resume Tuesday. (Black Press Media file photo)
BC Ferries’ website crashes in wake of provincial reopening announcement

Website back up now, recreational travel between health regions to resume as of Tuesday

Neighbours fight a small late-night bush fire with garden hoses and shovels in Cinnabar Valley on June 5. They couldn’t get help from local fire services because the fire was located in an area under B.C. Wildfire Services jurisdiction. (Photo courtesy Muriel Wells)
Neighbours on edge of Nanaimo city limits left to put out bush fire themselves

Cinnabar Valley residents tackle fire with hoses and buckets for two and a half hours

Darren Campbell’s truck (pictured) was stolen when he stopped to check on a car in a ditch on Cowichan Bay Road on Monday morning. (Facebook photo)
Vancouver Island Good Samaritan’s truck stolen in nasty trick

‘Try to be a Good Samaritan and my $20,000 truck gets stolen right under my nose’

The Kamloops Indian Residential School is photographed using a drone in Kamloops, B.C., Monday, June, 14, 2021. The remains of 215 children were discovered buried near the former school earlier this month. THE CANADIAN PRESS/Jonathan Hayward
Communities grapple with what to do with former residential and day schools

Some tear them down as a tool to help healing, others repurpose them as tools for moving forward

Creative handmade signs abound at the June 13 Tofino rally for old growth trees. (Nora O’Malley photo)
VIDEO: Tofino stands in solidarity for Fairy Creek Blockades

Over 150 supporters attend rally hosted by Friends of Clayoquot Sound

FILE – Provincial health officer Dr. Bonnie Henry talks about B.C.’s plan to restart the province during a press conference at Legislature in Victoria, Tuesday, May 25, 2021. THE CANADIAN PRESS/Chad Hipolito
B.C. officials watching U.K.’s Delta variant struggles, ‘may need to slow’ plan going forward

Studies show that one dose of vaccine is only 33 per cent effective in preventing B.1.617.2 spread

RCMP Const. Shelby Patton is shown in this undated handout photo. RCMP say that Patton was hit by an allegedly stolen truck that he had pulled over on Saturday morning in Wolseley, east of Regina. THE CANADIAN PRESS/HO, RCMP
Pair charged in Saskatchewan Mountie’s death make first court appearance

Const. Shelby Patton was hit by an allegedly stolen truck that he had pulled over Saturday morning

Most Read