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Answering one of the toughest questions a client can ask: How can I turn my savings into income?
Rising stock markets make growth investors happy—but they do little for clients who have other goals in mind. Today, investors are clamoring for higher income, more alpha and new ideas. Perhaps it may be time for advisors to add closed-end funds (CEFs) to their toolkit.
For years, many advisors have made closed-end funds a familiar part of their repertoire, having used them to help clients seek strong returns and income potential. In today’s environment, even more advisors may want to learn about their distinctive benefits, so they can add them to their roster of investment options.
Three core attributes make CEFs an attractive choice now:
1. Nearly all CEFs are built to generate income.
Most CEFs are purpose-built to pursue a reliable and steady stream of cash flow—a result of actively managing a fund’s portfolio as well as its distributions, often accompanied by tax efficiency. To further enhance income potential, advisors can target CEFs that apply leverage.
2. CEFs’ stable asset base fosters efficient portfolio management.
A key benefit of the CEF structure is its stable asset base. Unlike open-end mutual funds that sell an unlimited number of shares to investors, CEFs issue a set number of shares at the fund’s launch. Those shares then trade throughout the day on the stock exchange at values that reflect supply and demand. With no need to accommodate cash inflows or outflows daily, this structure provides broad investment flexibility and enables managers to commit to an investment thesis over the long term. In addition, a CEF portfolio can remain fully invested, without the need to retain excess cash that can dilute performance.
3. CEFs can help increase portfolio diversification while still offering cash flow.
Another benefit of a stable asset base attribute is the enhanced ability to include less liquid investments and alternative strategies with a long-term focus—enabling investors to easily access sectors they could not readily reach through other means. Because of their wider investment universe, CEFs can help diversify portfolios, potentially boost returns from non-traditional investments, and still offer reliable income potential.
Differentiate your practice with closed-end funds
Nuveen’s research suggests that adding closed-end funds to your toolkit may help you differentiate your practice and better serve more affluent, sophisticated investors. Advisors who use CEFs report that their average client tenure is longer than the average client tenure of advisors who do not use CEFs. In addition, advisors who use CEFs typically have more assets under management and higher average earnings. And as increasing numbers of clients approach retirement, closed-end fund expertise will become a must-have skill for advisors looking to evolve along with their clients’ needs.
To learn more about closed-end funds, click here for educational resources.