Closed End mutual Funds (CEF) are the original form of mutual funds, they are not talked about as frequently as open ended mutual funds which are the ones everyone is familiar with. So what are they and how are they different, for starters they trade all day on an exchange like a stock or ETF, they do not trade at Net Asset Value (NAV) they trade at a discount or premium to NAV based on demand they also trade with a bid/ask spread just like stocks and ETF’s. CEF’s have a fixed number of shares like stocks and they have Initial Public Offering’s (IPO). CEF’s also have more liberal rules as far as the investments they can own for example they can own unlisted securities, where open ended funds can only own listed securities.
So what’s the point? Well by having a fixed number of shares and allowing the market to set the price based on demand the fund managers are able to concentrate on managing the assets rather then trying to manage them while dealing with constant inflows and outflows of cash. They have the advantage of being able to harvest tax losses and gains when it is most advantageous and not when investors enter or leave the investment. CEF’s also at times have different investment plans then open ended funds which can cater to more sophisticated investors.
In the end, what most people don’t understand is the CEF’s are the predecessors of open ended mutual funds, the model did not allow for the type of growth the mutual fund market now represents and they needed to be modifiedto allow for the explosive growth we have seen over the last few decades, however there are plenty of investors who find CEF’s to be the right investment vehicle for their needs.
I just bought a CEF today it is going to be a short term trade for me, the ticker is GIM, it is the Templeton Global Income Fund, it is going ex-dividend tomorrow and will be paying out a dividend of $.62 on 12/31/12, I purchased my shares at $9.74 and the current NAV as of yesterday was $9.51 so I paid a premium of $.23. If you look at the price history of GIM you can see that it rebounds quickly on monthly income dividends it almost always opens higher the day following ex dividend day, on the year end dividends which include capital gains short and long term it takes about 3 to 4 weeks to regain pre-dividend pricing. This a bond and currency investment, I bought 1000 shares so I will generate $620 of income by year end and should be able to recoup my capital investment in about 2 weeks more.
I will let you know how it goes.