Like traditional mutual funds, closed-end funds (CEFs) are professionally managed portfolios that offer a convenient way to access a typically diversified pool of investments. But CEFs differ in an important way: they issue a fixed number of shares through an initial public offering (IPO). From that point forward, CEF shares trade on a stock exchange, offering daily liquidity at the current market price of those shares, as opposed to the actual value of the shares.1
Using Closed-End Funds to Seek Income
Like many investors, you may be looking for ways to generate consistent income. Closed-end funds (CEFs) may be able to help you achieve this important goal. CEFs offer the opportunity to seek attractive yields and capital appreciation in a professionally managed investment vehicle.
Closed-end funds offer several attractive features
Income Generation
Most CEFs seek to distribute income to shareholders on a monthly or quarterly basis by pursuing strategies intended to produce consistent yields, although no distributions are guaranteed.
Stable Asset Base
Because CEF shares can only be traded on an exchange after the IPO – as opposed to transacting directly with the fund, as is the case with mutual funds – CEFs have a generally stable asset base that allows the portfolio manager to implement the fund’s investment strategy without having to manage inflows or redemption requests.
Professional Management
CEFs are actively managed by investment professionals and offer access to institutional-quality managers and strategies that may not be available in traditional mutual funds.
Flexible Structure
CEFs have the ability to employ leverage by issuing debt, preferred shares or investing in derivatives, or to invest in less liquid securities. These strategies may offer the potential for higher income and enhanced returns, although the potential for better performance comes with increased risk.2
Real-Time Trading
CEFs are typically listed on an exchange, allowing you to purchase shares throughout the trading day. Because the market price will fluctuate, CEF shares may sell for more or less than the value of their underlying investments and your purchase price.
Automatic Dividend Reinvestment
Investors usually have the option to reinvest CEF dividends back into the fund on an ongoing basis, which offers the advantage of potentially compounding investment returns.
Why Consider Investing in Closed-End Fund Initial Public Offerings
Recent developments in the CEF structure removed upfront fees and added a finite term. Overall, the enhanced structure offers key advantages for CEFs. These include:
No upfront fees
Investment advisers have absorbed all offering costs on recent CEF initial public offerings, which means you no longer pay an upfront sales charge or offering expenses to participate (ongoing management and other fees still apply).
Full investment in the fund
Under the new structure, because the investment adviser bears all the upfront expenses, the entire commitment amount is invested in the fund, enhancing the potential for capital appreciation.
Finite term
At the end of a CEF’s term (typically 12 years), most funds allow investors to tender their shares and receive the net asset value of those shares at that time..
Diverse choices
CEFs are available across a wide range of investment categories including equities, taxable fixed income, and tax-free fixed income, and provide exposure to assets that may be difficult for you to otherwise access.
Morgan Stanley is a Global Leader in Closed-End Funds
We offer the scale, access and insights you need to participate with confidence in this dynamic market.
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1Our size and expertise are unmatched in the industry
Morgan Stanley is the largest distributor of closed-end funds.3
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2We offer unparalleled access to the closed-end fund marketplace
Morgan Stanley has relationships with the top asset managers in the CEF industry, giving you access to a diverse universe of CEFs in the primary and secondary markets.
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3Our research and insights help investors navigate the universe of available funds
Morgan Stanley Wealth Management Global Investment Office actively covers nearly 100 CEFs across the equity, taxable fixed income, and municipal bond categories. We publish insights that enable you to make more informed investment decisions.
Find a Financial Advisor to Learn More
If you’d like to know more about the income and capital appreciation potential of closed-end funds, a Morgan Stanley Financial Advisor can help.
Check the background of our firm and investment professionals on FINRA's BrokerCheck.
Disclosures
1 CEFs, unlike mutual funds, are not continuously offered. There is an initial public offering (IPO) and once issued, shares of CEFs trade on a stock exchange. Shares of CEFs frequently trade at prices lower (but sometimes higher) than the net asset value (NAV) of the CEF’s shares, which means that the market price of a CEF’s shares may be lower than the value of the securities and assets that the shares represent. This creates a risk of loss for investors when selling shares purchased in an IPO. The risk of loss due to this discount may be greater for investors expecting to sell shares in a relatively short period after completion of an IPO. Please consider whether to purchase shares of CEFs in an IPO or after the CEF begins trading on a stock exchange. Each method will generally involve different costs and affect how your Financial Advisor/Private Wealth Advisor is compensated. You should discuss this with your Financial Advisor/Private Wealth Advisor.
The risk that a CEF may trade at prices lower than the NAV of the CEF’s shares is separate and distinct from the risk that a CEF’s NAV can decrease as a result of investment activities. There is no assurance that a CEF will achieve its investment objective(s). A CEF’s common share price will fluctuate and, at the time of sale, may be above or below NAV and may be worth more or less than the original investment. Investors should only consider purchasing shares as a portion of a diversified portfolio. A CEF’s NAV will be reduced immediately following an offering by any applicable sales load and offering expenses paid by a CEF.
2 Leverage is a speculative technique and there are special risks and costs associated with leveraging, including (i) the likelihood of greater volatility of NAV, market price and dividend rate than a comparable CEF without leverage; (ii) the risk that fluctuations in the interest or dividend rates that leveraged CEFs must pay on any leverage will reduce the return for a leveraged CEF; (iii) the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the CEF than if the CEF were not leveraged, which can, in turn, result in a greater decline in the market price of the CEF; and (iv) leverage generally increases operating costs, which reduce total return. There is no assurance that a leveraging strategy will be successful.
3 Source: As per data sourced from Dealogic.
Please consider the investment objectives, risks, charges and expenses of a CEF carefully before investing. The prospectus contains this and other information about a CEF. To obtain a prospectus, investors should contact a financial advisor or visit the CEF’s website. Please read the prospectus carefully before investing.
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