Nov

7

Closed-End Funds

Posted by cameron

November 7, 2007 |

I heard about these for the first time today. Most people know about regular old mutual funds, mostly through 401K investing. Supposedly those are called open-end funds; I guess to differentiate from closed-end funds. Money flows in and out of mutual funds on a daily basis as customers buy and sell shares in the fund. Anyone can join as long as you have the “entrance fee” to invest; that is minimum investment amount to open an account. Closed-end funds are different in that shares are purchased at the beginning of the funds life and that is all the shares to be had. The fund supposedly stays that way until the day it closes, at which point all shareholders cash out. It’s not to say that shares don’t change hands, they do, but only when someone has sold to a third party do they become available for another investor to “join the club”.

Having invested in open-end funds for decades this seems to be a strange animal. Why close the door to on-going investment? It’s almost like a country club membership where you can sell yours to someone waiting if you have to leave town. In a way the fund operates like a company. At the start of it’s life it has an Initial Public Offering or IPO. Investors buy the shares until they are all gone. The value of the “fund” is driven by its own supply and demand rather than the value of the companies it owns in its portfolio. That is a big difference versus regular open end funds. I suppose it is possible for the value of the fund to be higher than the sum of the individual stocks. It is hard to understand how that can be but there must be some other intrinsic value that is not self evident. This is a vehicle I can live without but maybe I’m missing something here.


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