For many years, all closed-end funds (CEFs) were structured as perpetual funds, meaning they have no “maturity” or termination date. The introduction of CEFs with defined terminations — term and target term funds — has created additional opportunities for investors.
All closed-end funds (CEFs), regardless of their structure, have some basic features in common:
- They raise investment capital by offering a fixed number of shares through an initial public offering (IPO)
- Following the IPO, fund shares trade in the open market on an exchange.
- Investors can purchase fund shares during the IPO and/or after the IPO via the exchange.
The primary differences between perpetual, term and target term funds are the options available to investors looking to exit their fund investments and what they can expect to receive.
Perpetual Funds
Because perpetual CEFs don’t have a termination date, shareholders looking to exit their investment sell their shares on the exchange at the current market price, which may be more or less than their purchase price.
Why consider a perpetual CEF?
Investors may choose a perpetual fund because they can remain invested in the fund until they decide to sell their shares. Given that the majority of CEFs today are perpetual, investors also have more choices when it comes to strategies and asset classes in which to invest.
Term funds
A term fund has a specified termination date at which time the fund’s portfolio is liquidated. Investors who own shares when the fund terminates receive a cash payment equal to the NAV per share at that time. This NAV may be higher or lower than what the investor originally paid.
Why consider a term CEF?
Investors may prefer a term CEF because they have a specific investment time horizon that aligns with the fund’s termination date and know they will receive the NAV per share at that time. Since CEF NAVs tend to be more stable and predictable than prices set in the market, a term fund’s return of NAV can provide a greater level of price certainty than selling shares in the open market.
Target term funds
Like term CEFs, target term funds have a defined termination date. However, target term CEFs seek to return a specific, predetermined amount per share to shareholders when the fund terminates, rather than whatever amount the then-current NAV represents. At Nuveen, this amount is the NAV at the time of the IPO (“original NAV”).2 Therefore, shareholders who purchased their shares at the IPO expect to receive the same NAV per share that they originally paid. Shareholders who purchased shares after the IPO should also receive the original NAV, but that may be more or less than the price they paid for their shares.
Because one of the goals of a target term CEF is to return the original NAV to shareholders, the fund’s managers will manage the portfolio to help ensure sufficient assets are available at termination to meet this objective.3 For this same reason, bond strategies are more prevalent in target term as well as term funds because bond maturities can be more easily aligned to a fund’s termination date.
Why consider a target term CEF?
The appeal of target term CEFs is two-fold: the defined life of the fund which, like term funds, enables investors to plan to future investments or expenses, and the fact that shareholders know specifically what amount per share the fund is targeting to return. For shareholders who bought on the IPO, this amount is equal to their initial principal investment.
1 Although the fund has no specified termination date, it can be terminated upon notice to shareholders.
2 The objective to return the Fund’s original NAV is not an express or implied guarantee obligation of the Fund.
3 This typically includes limiting the fund’s investment to securities with maturities near that of the fund’s termination, and may include retaining a portion of the fund’s earnings which would reduce fund distributions prior to termination.
Important risk considerations
Closed-end fund shares are subject to investment risk, including the possible loss of the entire principal amount that you invest. Common shares frequently trade at a discount to their NAV. At any point in time, your common shares may be worth less than you paid, even after considering the reinvestment of fund distributions. Closed-end fund historical distribution sources have included net investment income, realized gains, and return of capital.
FAQs
A closed-end fund is a type of mutual fund that issues a fixed number of shares through one initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.
What is the term structure of a closed-end fund? ›
A term fund has a specified termination date at which time the fund's portfolio is liquidated. Investors who own shares when the fund terminates receive a cash payment equal to the NAV per share at that time. This NAV may be higher or lower than what the investor originally paid.
What is a good Z score for a CEF? ›
Z-score can also help investors uncover potentially truly undervalued and overvalued CEFs. If the z-score is greater than +2 or less than -2, more research would be warranted.
What is the downside to closed-end funds? ›
Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund's investment objective will be achieved.
What are the rules for a closed-end fund? ›
Closed-end funds generally issue a fixed number of shares that are listed on a stock exchange or trade in the over-the-counter market. The assets of a closed-end fund are professionally managed in accordance with the fund's investment objectives and policies, and may be invested in stocks, bonds, and other assets.
What is the purpose of a closed-end fund? ›
A closed-end fund is a type of investment company that pools money from investors to buy securities. Closed-end funds are similar to mutual funds in that they professionally manage portfolios of stocks, bonds or other investments (including illiquid securities).
What are the advantages of a closed-end fund? ›
Closed-end funds (“CEFs”) can play an important role in a diversified portfolio as they may offer investors the potential for generating capital growth and income through investment performance and distributions.
How do you tell if a closed-end fund is trading at a discount? ›
Shares are said to trade at a "discount" when the share price is lower than the NAV. The discount is commonly denoted with a minus ("−") sign.
Why do closed-end funds sell at a discount? ›
Expectation. Similar to a stock, the expectation that a mutual fund will perform well may affect whether the market price is above or below the NAV. Portfolios expected to perform well in the near future will demand a premium to NAV, while those with assets expected to perform poorly may sell at a discount.
What is the largest closed-end fund? ›
One of the largest closed-end funds is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG). Founded in 2007, it had total net assets of $2.7 billion as of Dec. 31, 2023. 2 The primary investment objective is to provide current income and gains, with a secondary objective of capital appreciation.
But Clough Capital research also shows that closed-end discounts widen as interest rates rise and narrow as they fall. That's largely because of the leverage strategies many of these funds employ: lower rates mean lower borrowing costs.
Why would anybody want to invest in a closed-end fund? ›
The higher risk involved with investing in illiquid securities could translate into higher returns to shareholders. Second, regulators allow the funds to issue debt and preferred shares, with strict limits on leverage. The fund can issue debt in an amount up to 50% of its net assets.
Why are closed-end funds risky? ›
Closed-end funds operate more like ETFs, in that they trade throughout the day on a stock exchange. Closed-end funds have the ability to use leverage, which can lead to greater risk but also greater rewards.
Can you sell a closed-end fund at any time? ›
Investors can buy and sell shares throughout the day, and the fund's price on the exchange fluctuates during the day, much like a stock. A closed-end fund's market price can be the same as or higher or lower than its net asset value per share. (We'll dig into this below.)
Can you withdraw from closed-end funds? ›
With a closed-end fund, an investment company sells a fixed number of shares in the fund to investors. Managers of the fund have a relatively fixed amount of capital to invest over time, because investors can't withdraw money from the fund or buy in after the IPO — They can only buy or sell shares on an exchange.
How do I sell a closed-end fund? ›
The procedures for buying or selling closed-end funds are the same as for buying or selling stocks. Your broker can quote you the current market price of the shares, determined by competitive bidding.
What is an acceptable z-score range? ›
Assessment of z-scores is based on the following criteria: |z-score| ≤ 2.0 is regarded as satisfactory; 2.0 < |z-score| < 3.0 is regarded as questionable ('warning signal'); |z-score| ≥ 3.0 is regarded as unsatisfactory ('action signal').
What is a good z-score range? ›
What Is a Good Z-Score? 0 is used as the mean and indicates average Z-scores. Any positive Z-score is a good, standard score. However, a larger Z-score of around 3 shows strong financial stability and would be considered above the standard score.
What is a healthy z-score? ›
Bone density Z-score chart
| Z-score | Meaning |
|---|
| 0 | Bone density is the same as in others of the same age, sex, and body size. |
| -1 | Bone density is lower than in others of the same age, sex, and body size. |
| -2 | Doctors consider scores higher than this to be normal. |
| -2.5 | This score or lower indicates secondary osteoporosis. |
1 more rowIf the number of elements in the set is large, about 68% of the elements have a z-score between -1 and 1; about 95% have a z-score between -2 and 2 and about 99% have a z-score between -3 and 3.
