I'm wondering how many people have owned or considered owning a CEF or even know they exist. There are 550 such funds in the universe and due diligence will reveal about 10% of those that are worth considering for really first rate total returns! Unlike so called normal open ended mutual funds CEFs trade like a stock and have a set number of shares. The price of the stock may or may not be the same as the value of the portfolio which is the NAV, net asset value. That means you can often buy that portfolio at a solid 10-15% discount. That can be overrated however because the fund may always trade at a discount. Schwab provides such information about discounts or premiums and how a fund as sold historically. So why CEFs? 1. Incredible yields! A 30 year treasury will pay you around 1.7%. A CD at your bank will pay you around 1%. A quality CEF will pay 7-10%! So that is the main appeal folks. You own a fund that pays 8% a year and you reinvest those distributions that means you can increase your total shares at a rate of 2% a quarter which when compounded over 10 years means a 120% increase! A nice return even of the stock price never changes. 2. Management. CEFs are much easier to manage. A fund manager of an open ended fund has to deal with huge in or out flows of money depending how the fund has performed. That means constantly buying or selling the stocks or bonds in your portfolio to meet those changes. A fund manager of a CEF can build the best portfolio he knows how and not have to make those changes. 3. More liberal rules. CEF managers do not have as strict rules to work with. The funds are more flexible and many of these funds will have multiple asset classes of investments. The reason for those great yields is leverage which if not too excessive, 20-30% can help provide better long term returns. Some of the very best CEFs have creative ways they manage the fund or multiple management groups. The liberty funds are the best example of this. On the negative side CEFs can have much higher expenses and because they trade as a stock they can be volatile like any stock. Conservative income investors need to know that CEFs that invest in bonds will be more volatile than holding an open ended bond fund. In my opinion the superior yields are worth it.
I am vaguely familiar with them. To me, they are as unattractive as private-placed stocks. You cannot control when you liquidate. You have to wait until a willing buyer can be found and then there is usually a line in front of you of people looking to sell. We have a local bank that can take years to sell once once you buy in for that reason. Anyway, I have seen them mentioned in passing in some quarterly magazine I get for for high net worth individuals pushing overseas investments (though I am far from it and have no idea why they started sending it to me). I recall one time it was in reference to European construction bonds as developers there are starting to favor selling project-specific bonds as opposed to obtaining financing through loans or contributions.
Liquidity is something to be considered when buying these funds and some should be avoided for their lack of liquidity but that can be said about any stock. These are funds with hundreds of holdings. It not like there is going to be a huge run on them. I have had no problem buying or selling shares of these funds. I suppose you could only buy CEFs with market caps of a billion or higher. Another issue is sector quality. There are Reit, preferred, convertible and utility closed end funds that have delivered superior returns to the open ended versions. The Bancroft fund BCV is a superior convertible fund with superior yields to any comparable fund. Cohens and Steers has a fund RNP that will give you Reit and preferred stock exposure with a much better total return than any comparable fund. There are 10 Pimco bond funds that collectively pay an average yield of 9.8%. That is 2X the yield of the top Vanguard and Fidelity high yield bond funds.
Note that most brokers including Schwab who I use will reinvest those dividends for no charge. Schwab simply provides a box to check if you want to reinvest. I have been studying these funds solidly for the last year and you can build a solid portfolio that can outperform the major indices if you reinvest those dividends into more shares. For those who need the income the high yields are attractive for that. Some CEFs are pure income investments. The stock will not appreciate over time so all of your return is in the dividend. I'm looking for those high yields with some capital appreciation for a superior total return.
I'm wondering if this discussion might have better fit into the Finance discussion section of this forum. Because you seem to be talking about how an individual investor can make more money, rather than talking about the economy.
Technically but it is apple to oranges. Most open funds are required to repurchase the investment when the seller wants to sell regardless of whether anybody else wants to buy it at that very moment. Anyway, any investment has its pluses and minuses. The CEF's are beyond my wheelhouse. They seem to me to be better suited for long term, perhaps institutional investors, seeking dividends as opposed to eeking out profits on price volatility. I am strictly a short term (as in very short term) investor when it comes to the stuff I manage myself. I want to be in and out in a matter of weeks if not days. My 401K is mostly international growth funds to hedge against the US economy.
I generally tend to avoid them...high management fees, and from what I can tell a not-insignificant amount of these types of funds tend to juice their distribution rate by giving your own capital back to you rather than investing it and thereby eroding their NAV over time. That being said not all of them are bad. I bought BMEZ (Blackrock Health Sciences Trust II) at the beginning of 2020 and am up 50% since then, while the distribution rate is solid (around 4.70% last I checked)
The funds I will invest in will have reasonable fees and will have shown price appreciation over the last decade to at least account for inflation. The 2 Liberty Allstar funds(USA, ASG) are probably the best of the lot. The Bancroft fund BCV is a quality convertibles fund and Cohens & Steers Reits & Preferreds RNP is another on my short list. Blackrock has several quality funds but I'm looking for bigger yields. The 4 Tekla health care funds are also on my short list. HQH-HQL-THW-THQ I will also not buy a fund with a huge premium to NAV like a couple of the Pimco bond funds(PTY and PDI). I would prefer 2 other Pimco high yield funds with much smaller premiums PFN and PFL. It's about total return and growing my shares so high yields and some capital appreciation with sound management and reasonable expenses.
Thanks, I'll check these out. Don't know too much about CEFs other than a few Blackrock and PIMCO ones
