CEFs provide exposure to assets that may be difficult for you to otherwise access. They are available across a wide range of investment categories including equities, taxable fixed income, and tax-free fixed income. Always remember to review a CEF’s prospectus and/or shareholder reports to learn more about a fund’s strategies and individual features.
There are generally two methods for investing in CEFs: Purchasing shares in an IPO or in the secondary market (i.e., on a stock exchange). Each method will generally involve different costs, which will affect your return, so please discuss these methods with your Financial Advisor/Private Wealth Advisor.
Investors participate in a syndicated Closed-End Fund initial public offering prior to the fund listing on an exchange.
No Upfront Fees: Investment advisers have absorbed all offering costs on many recent CEF initial public offerings, which means you no longer pay an upfront sales charge or offering expenses to participate (ongoing management and other fees still apply).
Full Investment in the Fund: In the past, the upfront sales charge and offering expenses were deducted from the investment amount. Under the new structure, because the investment adviser bears all the upfront expenses, the entire commitment amount is invested in the fund.
Finite Term: Many CEFs are now offered with set terms which are typically 12 years. At the end of such terms, these funds typically seek to offer investors the ability to tender their shares and receive the NAV of those shares at that time (among other options). 🛈
Investors purchase a CEF on a stock exchange, through a financial intermediary, any time during market hours.
Transaction Fees: Secondary Market purchases may be subject to a sales commission (ongoing management and other fees still apply).
Potential For Higher Total Return: Closed-End Funds frequently trade at a discount in the secondary market offering the potential for higher long term total returns.
Wide Selection: There are ~420 closed end funds that trade in the secondary market across a wide range of investment categories.
Investors that do not participate in the primary offering, but instead purchase finite term CEFs on the secondary market, are still eligible to tender their shares and receive the NAV of those shares at the end of the term.
Our size and expertise are unmatched in the industry: Morgan Stanley is the largest distributor of closed-end funds.4
We offer unparalleled access to the closed-end fund marketplace: Morgan Stanley has relationships with the top asset managers in the CEF industry, giving you access to a diverse universe of CEFs in the primary and secondary markets.
Our research and insights help investors navigate the universe of available funds: Morgan Stanley Wealth Management Global Investment Office actively covers over 70 CEFs across all asset categories, publishing insights to help you make more informed investment decisions.
Closed-end funds differ from open-end funds in several ways. Unlike open-end mutual funds, which continuously issue new shares, closed-end funds issue a fixed number of shares through an initial public offering (IPO). Following an IPO, CEF shares typically trade on a stock exchange (i.e., the secondary market) and offer daily liquidity at the current market prices of those shares (as opposed to the value of the underlying investments). As a result, CEF shares often trade for less than the value of the fund’s underlying investments. By contrast, open-end mutual funds are priced based on the value of the fund’s underlying investments. Closed-end funds, in contrast with open-end mutual funds, have greater flexibility to use leverage and invest in illiquid securities.
After the IPO, there are a number of ways that a CEF can grow in size; 1) capital appreciation, 2) leveraging the fund by issuing debt or preferred shares, 3) conducting a secondary share offering (selling new shares to the public, usually via a Follow-On or At The Money offering ) or 4) conducting a rights offering (giving existing shareholders the right to invest more capital into the fund in proportion to their existing ownership).
The number can range from a few stocks up to hundreds, depending on the strategy, quantity of assets and the diversification or concentration of portfolio holdings. Funds which hold 30 or fewer stocks are sometimes called "focus funds," because they seek to concentrate on a lower number of high-conviction stock selections. While such a strategy can be rewarding for investors, it also involves greater risk than investing in a portfolio which is more diversified.
At any given point in time, a CEF’s share price may be above (premium) or below (discount) its NAV. Most closed-end funds trade at discounts. Premiums or discounts can be the result of one or a combination of factors including, but not limited to, market and investor sentiment, fund specific characteristics, and/or manager and firm recognition. When a closed-end fund trades at a discount, it creates a risk of loss for investors when selling shares. However, some believe that it may be advantageous to purchase a fund when it is trading at a discount to its NAV, as each dollar invested purchases more than a dollar of net assets. If the discount begins to narrow, investors would also have greater potential for capital appreciation.
Closed-End Funds commonly use leverage in an effort to achieve a higher rate of distributable income and potentially enhance returns. Leverage seeks to profit by borrowing at short-term interest rates, or issuing preferred stock, and investing the proceeds in longer-term securities that typically pay higher rates of return.
The amount of leverage a fund uses is expressed as a percent of total fund assets (e.g. if it has a 25% leverage ratio, that means that for each $100 of total assets under management, $75 is equity and $25 is debt).
Leverage amplifies gains when the market prices of the fund's investments rise, but it also amplifies losses when market prices decrease. This increases the volatility of a leveraged fund's net asset value, compared with an unleveraged peer.
If you’d like to know more about the income and capital appreciation potential of closed-end funds, a Morgan Stanley Financial Advisor can help.
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1 CEFs, unlike mutual funds, are not continuously offered. There is an initial public offering (IPO) and once issued, shares of CEFs trade on a stock exchange. Shares of CEFs frequently trade at prices lower (but sometimes higher) than the net asset value (NAV) of the CEF’s shares, which means that the market price of a CEF’s shares may be lower than the value of the securities and assets that the shares represent. Similar to publicly traded single stock equity securities, this creates a risk of loss for investors when selling shares at a lower price than the IPO or secondary market purchase price. The risk of loss due to this discount may be greater for investors expecting to sell shares in a relatively short period after completion of an IPO.
The risk that a CEF may trade at prices lower than the NAV of the CEF’s shares is separate and distinct from the risk that a CEF’s NAV can decrease as a result of market and/or investment activities. There is no assurance that a CEF will achieve its investment objective(s). A CEF’s common share price will fluctuate and, at the time of sale, may be above or below NAV and may be worth more or less than the original investment. Investors should only consider purchasing shares as a portion of a diversified portfolio. A CEF’s NAV will be reduced immediately following an offering if the sales load and offering expenses are paid from the proceeds of the CEF offering.
2 Leverage is a speculative technique and there are special risks and costs associated with CEFs employing leverage compared to unlevered CEFs, including (i) the likelihood of greater volatility of NAV, market price and dividend rate; (ii) fluctuations in the interest or dividend rates CEFs must pay to maintain leverage (i.e., costs associated with leverage); (iii) the multiplier effect of leverage in a declining market, which is likely to cause a greater decline in the NAV and market price of the CEF; and (iv) the likely increase in operating costs, which reduce total return. There is no assurance that a leveraging strategy will be successful.
3 Please consider whether to purchase shares of CEFs in an IPO or after the CEF begins trading on a stock exchange. Each method will generally involve different costs and affect how your Financial Advisor/Private Wealth Advisor is compensated. You should discuss this with your Financial Advisor/Private Wealth Advisor.
4 Source: As per data sourced from Dealogic.
Any type of continuous or periodic investment plan does not assure a profit and does not protect against loss in declining markets. Since such plan involves continuous investment in securities regardless of fluctuating price levels of such securities, the investor should consider his/her financial ability to continue his/her purchase through periods of low-price levels.
Please consider the investment objectives, risks, charges and expenses of a CEF carefully before investing. The prospectus contains this and other information about a CEF. To obtain a prospectus, investors should contact a financial advisor or visit the CEF’s website. Please read the prospectus carefully before investing.
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