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. 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 – 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 or preferred shares, 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 may fluctuate, CEF shares may sell for more or less than the value of their underlying investments. CEF shares often trade for less than their NAV.
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 their 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, 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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01Our size and expertise are unmatched in the industry
Morgan Stanley is the largest distributor of closed-end funds.3
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02We 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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03Our 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 Shares of closed-end funds frequently trade at a discount from their net asset value which may increase investors’ risk of loss. The risk of loss due to this discount may be greater for investors expecting to sell their shares in a relatively short period after completion of the public offering. This characteristic is a risk separate and distinct from the risk that a closed-end fund’s net asset value may decrease as a result of investment activities.
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 may result in a greater decline in the market price of the CEF; and (iv) leverage may increase operating costs, which may 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 need to contact a financial advisor. Please read the prospectus carefully before investing.
Besides the general investment risk of holding securities that may decline in value and the possible loss of principal invested, closed-end funds may have additional risks related to declining market prices relative to net asset values (NAVs), active manager underperformance and potential leverage. Some funds also invest in foreign securities, which may involve currency risk. There is no assurance that the fund will achieve its investment objective.
Closed-end funds, unlike open-end funds, are not continuously offered. There is a one-time public offering and once issued, shares of closed-end funds are sold in the open market through a stock exchange. NAV is total assets, less total liabilities divided by the number of shares outstanding. At the time an investor purchases shares of a closed-end fund, shares may have a market price that is above or below NAV.
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