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Closed-end funds

Investing in closed-end funds: A primer

Abstract wood shapes (image)
Investors looking for predictable income potential should consider closed-end funds
 

Why closed-end funds?

Income potential designed for regular distributions 
CEFs are specifically designed with a goal of translating their total returns into consistent, predictable—and often, tax-advantaged—income over time. A team of professionals actively manages all aspects of the fund—including its holdings, leverage, and distributions— seeking to produce regular monthly or quarterly distributions.

Diversification via a broader investable universe
CEFs offer exposure to a wide array of income-producing assets in public and private markets around the world, including many that are difficult to access using other vehicles, such as less liquid markets or securities and alternative assets, as well as micro-cap equity investments.

Greater flexibility through fully-invested portfolios
Unlike open-end funds, CEFs don’t need to manage daily inflows and outflows from investors buying and selling shares. This means the funds can remain fully invested in their strategy, rather than needing to hold cash aside like an open-end fund. It also provides the freedom to take a longer-term view, and employ techniques such as leverage to potentially boost income.

How can closed-end funds offer more income and diversification potential?

Broader investment universe
Closed-end funds (CEFs) can invest in specialized, less liquid corners of the market where open-end funds may not venture, such as alternative securities, real estate, and private placements. They enable individual investors to gain exposure to assets many could not access any other way. However, these types of securities may pose higher risk.

Leverage
CEFs enjoy greater freedom than open-end funds to employ leverage as part of their strategies. Leverage—that is, borrowing to gain greater investment exposure and potential opportunities—typically magnifies investment returns, leading to higher highs and lower lows.1 Over longer periods, it has historically boosted income more than enough to compensate for its added cost and volatility.

Professionally managed
CEFs are actively managed with a goal of providing shareholders with consistent and predictable distributions. Product managers work to smooth income streams and manage distributions.

Exchange traded
CEFs trade on exchanges, with their share prices determined by supply and demand. Often, shares trade at a discount to the fund’s net asset value, giving investors an opportunity to invest at a “bargain.” This unique feature of CEFs offer investors greater control over when they buy and sell their shares and at what price.

 


Open- vs. closed-end funds

 

Open-end funds

 

Closed-end funds

Open-end funds create new shares every time a shareholder invests. When shareholders sell, the fund must have cash on hand to buy back (redeem) the shares at current net asset value.

 

After the initial public offering (IPO), CEF shares trade on an exchange between shareholders, like stocks. The fund does not need to be concerned with having enough liquidity to meet redemptions.

closed-end fund diagram (image) 

 

closed-end fund diagram (image)

Need to manage for unpredictable asset base, hunting for ways to invest large inflows and potentially selling assets at unattractive prices to meet sudden redemptions.

 

A stable pool of assets, which enables portfolio managers to stay focused on strategy while taking advantage of longer-term approaches, including leverage.

Cannot invest in many illiquid and alternative assets due to regulatory restrictions, as well as the need to maintain liquidity.

 

Able to invest in a broad universe, including nearly every equity and fixed income asset class, less liquid and less accessible parts of the market.

Orders transacted once a day at the close of business, based on the closing net asset value (NAV) per share.2

 

Intraday pricing and trading, allowing investors greater pricing transparency, flexibility, and the potential to buy shares at a discount to NAV.3

The characteristics shown are not all inclusive and represent general attributes of typical investments of the types indicated.
2 Closed-end fund shares bought during the initial public offering are purchased at the original/IPO NAV plus a sales charge. After the IPO, CEF shares are bought/sold at market price, plus brokerage commission/transaction fees. Mutual fund shares are bought/sold at NAV, plus sales charges.
3 CEF shares may also trade at a premium to NAV.
 

Key concepts of closed-end funds

These four concepts are key to understanding the value of closed-end funds:

  1. Portfolio - The CEF structure enables access to a wide range of portfolio investments, including alternatives
  2. Fund structure and leverage - Many CEFs employ modest financial leverage to increase return and distribution potential
  3. Professional distribution management - Nuveen seeks to fully convert a fund’s total return into smooth, attractive distributions over time
  4. Exchange listing - Share prices are set by supply and demand

Key concepts of closed-end funds Chart (image)

Why invest with Nuveen?

MARKET LEADERSHIP

A pioneer in long-term income solutions

FOCUSED EXPERTISE

Active management from Nuveen and its independent investment specialists

DEEP COMMITMENT

Pursuing long-term, lasting value for advisors and investors

Past performance does not guarantee future results. Distribution rates represent the latest declared regular distribution, annualized, relative to the most recent market price and NAV. Special distributions, including special capital gains distributions, are not included in the calculation. Historical distribution sources have included net investment income, realized gains and return of capital.



1 Leverage typically magnifies the total return of a fund’s portfolio, whether that return is positive or negative, and creates an opportunity for increased common share net income as well as higher volatility of net asset value, market price, and distributions. There is no assurance that a fund’s leveraging strategy will be successful.

It is important to consider the objectives, risks, charges and expenses of any fund before investing. Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund’s investment objective will be achieved. Closed-end fund shares may frequently trade at a discount or premium to their net asset value (NAV). When sold, shares may be worth more or less than the purchase price or the net asset value. It is important to consider the objectives, risks, charges and expenses of any fund investing. For this and other information that should be read carefully, please view the prospectus or other current fund information provided by the fund’s sponsor.

Open-end mutual funds and CEFs are different types of investment vehicles with different expense structures and different inflows/outflows and distribution requirements. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time.

Closed-end fund historical distribution sources have included net investment income, realized gains, and return of capital.

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