Closed End Funds

[MarkSA]

I recently became aware of Closed End Funds, and i'd like to test technical indicators out on some of them.

The problem is, i'm not very familiar with how these operate. From what I can tell, they are fairly similar to ETFs as far as trading them goes. However, after googling the topic, I see a lot of discussion about premiums, discounts, and the NAV of the funds.

Currently, i'm planning to use end of day adjusted closing price data from Yahoo to run most of my tests on them. This adjusts the price of the fund for dividends and splits which might have occurred over time.

But what's unclear to me is if this is reliable data to use. Would it be possible to buy a closed-end fund at the closing price that is listed by Yahoo, or would the actual price that the fund would to me at be different due to the NAV?

Also, i've read that closed end funds have management fees. How are those deducted if the funds can be traded just like stocks? Is it a % amount deducted from each trade?

I'm a bit confused about this. If anyone knows this or can explain closed-end funds a little better, i'd greatly appreciate it.

 

[Jack o'Clubs]

Closed-end funds are basically the same as investment trusts which are pretty popular in the UK, and because they tend to be invested in 'themes' can get some great long term trends going, so good for position traders.

The price shown on, say, Yahoo, is the price you pay when trading the fund. But usually this will be at a discount (or sometimes premium in a hot fund or sector) to the NAV. All this means is that the market is willing to pay slightly less for the assets than the carrying value that the fund has them at - one reason for that is the assumption that management fees will be paid into perpetuity. In extreme cases this is a judgement on the asset managers at the fund - the market is assuming that they destroy value. In fact some investors will target ITs trading at an excessive discount on the assumption that sooner or later the fund will do something about it (or at least an active investor might) and close the gap. Generally discounts up to about 10% are reasonable, more than that and the market is trying to tell you something, so either beware of take advantage...

Management fees will be applied periodically and withdrawn from the funds' assets, so the NAV will reduce - the share price should stay relatively stable as it should already discount the fees in the difference between the price and the NAV.

If there's nothing on the web about US closed-end funds (hard to believe) - try the AIC website in the UK (www.theaic.co.uk) since investment trusts work in exactly the same way.

 

[MarkSA]

Thanks for the explanation. That clears things up a lot.