What is a Closed-End Fund?

The term ‘closed-end fund’ refers to a fund that issues a fixed number of shares to investors and does not issue new shares once the initial shares are sold.

What does the term, ‘Closed-End Fund’ mean?

Closed-end funds are so named because they issue, or sell, a fixed number of shares to investors during an initial public offering (IPO). Once the IPO is completed, the transaction is closed, meaning that no additional shares will be available from the fund sponsor. After the IPO, closed-end funds trade on an exchange, like the NASDAQ or New York Stock Exchange, and investors can buy and sell shares of a fund just as they would stocks. The fund company does not issue new shares, nor redeem existing shares. At times, additional shares may be created through a secondary offering, rights offering or by issuing shares for dividend reinvestment.

Like other investment funds, closed-end funds are a publicly traded investment company that follows a stated investment objective when making investments. Investment professionals, who typically invest in various types of securities to meet a specific investment strategy, actively manage closed-end funds.

The total value of the securities held in the portfolio of a closed-end fund is calculated to determine a collective portfolio value, which is then divided by the number of shares outstanding to arrive at the Net Asset Value (NAV).

The actual price of a closed-end fund in the market may differ from the calculated NAV because the market price may be influenced by other factors, including supply and demand. When supply is greater than demand, the price of a closed-end fund may be less than its NAV and is said to be trading at a discount. If demand is greater than supply, then the closed-end fund’s price will be higher than its NAV and is said to be trading at a premium.

Historical Snapshot of Closed-End Funds

Closed-end funds have existed for more than 120 years. They appeared in the United States in 1893 with the launch of the first U.S.-based, closed-end fund, the Boston Personal Property Trust.

The Investment Company Act of 1940 was created by Congress to provide guidelines for new investment vehicles called pooled investments or investment funds and to restore investor confidence following the 1929 stock market crash. The ‘40 Act, as it is commonly known, has supported the growth of the investment fund industry.

At present, there are more than 600 closed-end funds, totaling nearly $300 billion in assets. Some of these funds have long-standing management and a performance history that extends more than 50 years. Investors tend to buy and hold closed-end funds shares for long periods. As such, it’s common that shares are passed from one generation to the next.