Market
Memos from Howard Marks: The Indispensability of RiskClosed-End Funds
Fund structure allows for active management of investments that can boost income potential
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A Primer
A closed-end fund is a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for its investments. Its shares can then be bought and sold on a stock exchange, but unlike open-end funds, closed-end funds have a fixed number of shares outstanding at any given time.
The share price of such a fund is determined on the open market (rather than by its NAV), so it may trade at a premium or discount to its NAV. Closed-end funds are actively managed and aim to generate higher total returns than passive investments, often using leverage. This can lead to higher potential returns but also comes with higher risk.
Features
Closed-end funds have the following features and potential benefits:
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Attractive distributions
Paid monthly or quarterly either in cash or reinvested, distributions often exceed those of comparable investment vehicles
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Enhanced outcomes through leverage
Leverage adds risk but can potentially enhance income and total return
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Daily liquidity
Investors can trade shares on an exchange
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Stable asset base
Portfolio managers have greater flexibility in the types of securities and investment strategies they can utilize, because these funds are not subject to daily redemptions