puzzleContent provided by Marc Pfeffer, CLS Portfolio Manager

At the annual NorthStar Summit in Nashville last month, there was a lot of interest from financial advisors about CLS’s new active income strategies. Some of that conversation focused on closed-end funds (CEFs), which we’ve begun to use within active income strategies. Many advisors may be unfamiliar with CEFs and how they operate. Overall, CEFs are managed according to a variety of investment mandates. For example, they are available as diversified equity funds, taxable U.S. bond funds, municipal bond funds, sector and specialty funds, global and international equity funds, single-country equity funds and floating rate funds. The Wall Street Journal has a helpful, how-to guide on closed-end fund investing. Here are some key excerpts:

  • The value of these shares is based on demand. If lots of investors buy shares, the price goes up. If investors dump them, the price goes down.
  •  If you invest in a closed-end fund with a share price that’s lower than its net asset value (NAV), congratulations, you’re getting a discount. If the gap between that fund’s share price and its NAV narrows after you invest, you’ll receive a bonus when you sell shares….But don’t get overly concerned with these figures. Most closed-end funds offer a discount. The key is knowing how much of a discount they’re offering and whether you think the fund will perform well over time. If it does and the discount shrinks after you’ve purchased shares, then you earn a profit.
  •  Closed-end funds tend to be actively managed — meaning the fund’s manager buys and sells securities in an effort to outperform the fund’s benchmark index, such as the Dow Jones Industrial Average [or S&P 500].*
  •  In recent years, closed-end funds have fallen out of favor with average investors. That’s due largely to the rise in popularity of open-end funds and exchange-traded funds (ETFs).
  •  To make this simple, think of an ETF as the cousin of the closed-end fund. ETF shares trade on the stock exchange—just like closed-end funds.**

Closed-end funds do have a few [potential] benefits:

  •  A closed-end fund’s discount offers you a bonus when the gap between the share price and NAV narrows after investment.
  •  A closed-end fund’s manager can invest without worrying that cash may be needed to meet sudden redemptions by large numbers of jittery investors, as is the case with open-end fund managers.
  •  Closed-end funds tend to pay investors higher levels of income because they invest more heavily in income-producing assets — more inflows of new money.

We’ve done our homework, and we believe there is a place for CEFs in CLS portfolios.


* Given the tendency for CEFs to be actively managed, there may be more buying/selling within the funds, which can result in higher fees and increased taxes.
** While ETFs and CEFs share similarities such as trading on exchanges, the funds’ mandates, fees, and taxes may differ.
This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument.  There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such.  All opinions expressed herein are subject to change without notice. This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report.  Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.  Investors should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Individual client accounts may vary.  Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies.
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A closed-end fund (CEF) is a type of investment company that raises a fixed amount of capital through an initial public offering (IPO). It represents an interest in a specialized portfolio of securities that is usually actively managed by an investment advisor and which typically concentrates on a specific industry, geographic market, or sector. The buying and selling in an active managed portfolio may result in higher fees and increased taxes. The price of a CEF fluctuate according to market forces (supply and demand) as well as the changing values of the securities in the fund’s holdings. CEFs are subject to the same risks as an individual stock, as well as additional risks based on the sectors or the leverage and/or options used in the fund. An ETF is a type of investment company whose investment objective is to achieve the same return as a particular index, sector, or basket. To achieve this, an ETF will primarily invest in all of the securities, or a representative sample of the securities, that are included in the selected index, sector, or basket.  ETFs are subject to the same risks as an individual stock, as well as additional risks based on the sector the ETF invests in.