Closed-end Funds

One of Robinson Funds’ primary focus is identifying pricing inefficiencies of high yielding closed-end funds which often trade at a significant discount to their underlying net asset values.

Closed-end funds are professionally managed investment companies. Closed-end funds generally issue a fixed number of common shares that are listed on a stock exchange or traded in the over-the-counter market. Once issued, a closed-end fund’s common shares typically are not purchased or redeemed directly by the fund but instead are bought and sold in the open market. Closed-end funds primarily attract retail investors lacking the expertise and acumen to evaluate the true net asset value (NAV) of the securities. Typically, the underlying holdings of these funds (the funds’ NAV) have a greater value than the fund’s market price. For example, if a fund has an NAV of $100 based on the underlying value of its securities, but is priced at $90, it is selling at a 10% discount. Although the market eventually corrects the pricing discrepancy, identifying the discount before the correction provides a classic, “buy low, sell high” opportunity.

Robinson Funds has developed proprietary real-time models to immediately analyze and rank closed-end fund relative values. In keeping with its conservative investment focus, when the Firm buys a closed-end fund it hedges attendant risks it considers unnecessary and/or undesired through the purchase of options, futures, credit default positions and other securities.

Why invest in a closed-end fund?
Closed-end funds (CEFs) are designed to provide an attractive income with an opportunity for total return. Like mutual funds, they offer investors professional investment management and diversification, but unlike mutual funds they can be bought and sold intraday offering more control over buy and sell decisions. There are over 600 closed-end funds across a variety of strategies that can help fill a vital role in an investor's portfolio providing both capital appreciation and distribution of income. CEFs trade at a discount or premium to their net asset value, therefore they may offer the potential to purchase the funds’ underlying portfolio at an attractive, discounted price, which can lead to enhanced returns.
In what types of securities do closed-end funds invest?
Closed-end funds invest in a wide variety of securities, including common stocks, preferred stocks, high-yield bonds, municipal bonds, loans, convertible bonds, REITs, MLPs, and foreign securities. Because a closed-end fund does not need to maintain cash reserves or sell securities to meet redemptions, the fund has the flexibility to invest in less-liquid portfolio securities (i.e., securities of very small companies or municipal bonds that are not widely traded).
What benefit does a closed-end fund offer over a regular mutual fund?
Unlike mutual funds which can only be bought or sold on the price established at the end of the trading day, closed-end funds can be purchased and sold throughout the trading day with no minimum required. Shares are traded on a daily basis between investors, creating fluctuation around the net asset value and an opportunity to buy at a discount. Since closed-end fund shares raise the total amount of the fund in the primary IPO market, portfolio managers are not required to purchase or sell shares to meet cash flow demands, allowing them to stay fully-invested. Closed-end funds can borrow money to invest in more assets (referred to as leverage) to enhance their return. Leverage allows portfolio managers the ability to enhance yield and provide investors with superior performance and flexibility, although it can also carry increased risks that investors should be aware of before making any purchase. Closed-end funds generally offer lower expense ratios than the open-end mutual funds, resulting in the chance to enhance investment performance over time.
Why do some closed-end funds sell at a discount/premium?
A closed-end fund's share price is based on supply and demand among investors. Market conditions can influence the price of a CEF being above (at a premium to) or below (at a discount to) it's NAV. Some of the factors that may impact whether a fund trades at a premium/discount are the fund's performance, yield, or name recognition of a fund's manager. Discounted closed-end funds offer investors the advantage of buying the fund's underlying assets at a discount, which can lead to enhanced returns.
How could rising interest rates affect high-yielding closed-end funds?
Rising interest rates will cause funds with long duration fixed income holdings to lose value as bond prices fall. Any funds with larger amounts of variable rate leverage may suffer as their interest cost will rise and the price drop in any fixed income they might hold will be magnified.
How liquid are closed-end funds?
Closed-end funds are publicly traded securities similar to stocks. The majority of closed-end funds fall into the small cap category. The Robinson trading desk members have deep experience trading small and micro-cap stocks for multi-billion dollar funds over the course of their career. They have built a robust network that accesses retail order flow to complement their existing institutional relationships and electronic execution tools.
What type of shareholder protections do closed-end funds offer?
Closed-end funds are governed by the Investment Company Act of 1940, a law that governs how all registered investment companies must be structured and operated. All closed-end funds must meet certain operating standards, observe strict antifraud rules, meet diversification requirements, and disclose complete information to investors. The Securities and Exchange Commission (SEC) oversees regulations under the ’40 Act. Like all registered investment companies, closed-end funds must have a board of directors elected by the fund’s shareholders to oversee the management of the fund’s business affairs and to protect the fund’s interests, taking into account the interests of all shareholders.
How many closed-end funds are there?
According to Investment Company Institute data, as of the end of December 31, 2016 there were 530 closed-end funds. The total assets held by closed-end funds was $262 billion.