This chapter describes recent closed-end fund developments in the United States and provides a profile of the U.S. households that own them.

Closed-end funds are one of four types of investment companies, along with mutual (or open-end) funds, exchange-traded funds (ETFs), and unit investment trusts. Closed-end funds generally issue a fixed number of shares that are listed on a stock exchange or traded 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 securities.

What Is a Closed-End Fund? 

A closed-end fund is a type of investment company whose shares are listed on a stock exchange or traded 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 equities, bonds, and other securities. The market price of a closed-end fund share fluctuates like that of other publicly traded securities and is determined by supply and demand in the marketplace.

A closed-end fund is created by issuing a fixed number of common shares to investors during an initial public offering. Subsequent issuance of common shares can occur through secondary or follow-on offerings, at-the-market offerings, rights offerings, or dividend reinvestments. Closed-end funds also are permitted to issue one class of preferred shares in addition to common shares. Preferred shares differ from common shares in that preferred shareholders are paid dividends but do not share in the gains and losses of the fund. Issuing preferred shares allows a closed-end fund to raise additional capital, which it can use to purchase more securities for its portfolio.

Once issued, shares of a closed-end fund generally are bought and sold by investors in the open market and are not purchased or redeemed directly by the fund, although some closed-end funds may adopt stock repurchase programs or periodically tender for shares. 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. For example, a closed-end fund may invest in securities of very small companies, municipal bonds that are not widely traded, or securities traded in countries that do not have fully developed securities markets.

Total Assets of Closed-End Funds 

At year-end 2015, 558 closed-end funds had total assets of $261 billion (Figure 4.1). The number of closed-end funds available to investors remains below its peak of 662 at the end of 2007 due to the effects of mergers, liquidations, and conversions. Total assets at year-end 2015 were down 10 percent ($28 billion) from year-end 2014 and remain below the 2007 peak of $312 billion. Several factors have limited the growth in both the assets and the number of closed-end funds in recent years. First, fewer closed-end funds launched in 2015 than in recent years. Second, several closed-end funds have repurchased shares through tender offers over the past few years, reducing the number of outstanding shares and the size of assets under management. Third, a few closed-end funds have liquidated each year and others have converted into open-end mutual funds or exchange-traded funds (ETFs). Finally, closed-end fund preferred share assets declined during the financial crisis of 2007–2009.

Figure 4.1

Total Assets of Closed-End Funds Were $261 Billion at Year-End 2015

Billions of dollars; year-end, 2005–2015

Figure 4.1

 

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Source: ICI Research Perspective, “The Closed-End Fund Market, 2015”

Historically, bond funds have accounted for a large share of assets in closed-end funds. At year-end 2000, 74 percent of all closed-end fund assets were held in bond funds with the remainder held in equity funds (Figure 4.2). At year-end 2015, assets in bond closed-end funds were $161 billion, or 62 percent of closed-end fund assets. Equity closed-end fund assets totaled $100 billion, or 38 percent of closed-end fund assets. These relative shares have shifted, in part because cumulative net issuance of equity closed-end fund shares has exceeded that of bond fund shares over the past nine years. In addition, total returns on U.S. stocks* averaged 5.6 percent annually from year-end 2000 to year-end 2015, while total returns on bonds† averaged 5.0 percent annually.

* As measured by the Wilshire 5000 Total Return Index (float-adjusted).
† As measured by the Citigroup Broad Investment Grade Bond Index.


Figure 4.2

Equity Funds’ Growing Share of the Closed-End Fund Market

Percentage of closed-end fund total assets, year-end 2000 and 2015

Figure 4.2

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Note: Components may not add to 100 percent because of rounding.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2015”

Net Issuance of Closed-End Funds 

Net issuance of closed-end fund shares decreased to $1.7 billion in 2015 from $4.9 billion in 2014, as investor demand for equity closed-end funds waned (Figure 4.3). Net issuance of equity closed-end funds fell to $1.2 billion in 2015 from $4.3 billion in 2014, and demand for bond closed-end funds edged down to $486 million from $578 million in 2014. For the first time since 2007, net issuance of global/international equity closed-end funds accounted for the bulk of the equity fund net issuance.

Figure 4.3

Closed-End Fund Net Share Issuance1

Millions of dollars, 2007–20152

  Total   Equity   Bond
Total Domestic Global/
International
Total  Domestic
taxable
Domestic
municipal
Global/
International
2007 $28,369   $24,608 $4,949 $19,659   $3,761 $1,966 -$880 $2,675
2008 -22,298 -8,739 -7,052 -1,687 -13,560 -6,770 -6,089 -700
2009 -3,259 -2,520 -2,366 -154 -739 -788 -238 287
2010 5,430 2,054 1,995 59 3,376 1,900 1,119 357
2011 6,018 4,466 3,206 1,260 1,551 724 825 2
2012 11,385 2,953 2,840 113 8,432 3,249 3,102 2,081
2013 13,677 3,554 4,097 -543 10,123 3,921 -220 6,423
2014 4,891 4,314 3,819 494 578 266 523 -212
2015 1,676 1,190 148 1,043 486 678 -87 -104

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1Net share issuance is the dollar value of gross issuance (proceeds from initial and additional public offerings of shares) minus gross redemptions of shares (share repurchases and fund liquidations). A positive number indicates that gross issuance exceeded gross redemptions. A negative number indicates that gross redemptions exceeded gross issuance.
2Data are not available for years prior to 2007.
Note: Components may not add to the total because of rounding.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2015”

Closed-End Fund Distributions 

In 2015, closed-end funds distributed $16.8 billion to shareholders (Figure 4.4). Closed-end funds may make distributions to shareholders from three possible sources: income from interest and dividends, realized capital gains, and return of capital. Income from interest and dividends made up 69 percent of closed-end fund distributions, with the majority of income distributions paid by bond closed-end funds. Return of capital comprised 17 percent of closed-end fund distributions, and capital gains distributions accounted for 13 percent.

Figure 4.4

Closed-End Fund Distributions

Percentage of closed-end fund distributions, 2015

Figure 4.4

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* Income distributions include payments from interest and dividends.
Note: Components do not add to 100 percent because of rounding.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2015”

Closed-End Fund Leverage 

Closed-end funds have the ability, subject to strict regulatory limits, to use leverage as part of their investment strategy. The use of leverage by a closed-end fund can allow it to achieve higher long-term returns, but also increases risk and the likelihood of share price volatility. Closed-end fund leverage can be classified as either structural leverage or portfolio leverage. At year-end 2015, at least 365 funds, accounting for 65 percent of closed-end funds, were using structural leverage, certain types of portfolio leverage (tender option bonds or reverse repurchase agreements), or both as a part of their investment strategy (Figure 4.5).

Figure 4.5

Closed-End Funds Employing Structural and Certain Types of Portfolio Leverage

Number of funds; end of period, 2012–2014, 2015:Q1–2015:Q4

Figure 4.5

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1Components do not add to the total because funds may employ both structural and portfolio leverage.
2Structural leverage affects the closed-end fund’s capital structure by increasing the fund’s portfolio assets through borrowing and issuing debt and preferred stock.
3Portfolio leverage results from particular types of portfolio investments, including certain types of derivatives, reverse repurchase agreements, tender option bonds, and other investments or types of transactions. Data are only available for reverse repurchase agreements and tender option bonds. Given data collection constraints, and the continuing development of types of investments/transactions with a leverage characteristic (and the use of different definitions of leverage), actual portfolio leverage may be materially different from what is reflected above.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2015”

Structural leverage, the most common type of leverage, affects the closed-end fund’s capital structure by increasing the fund’s portfolio assets. Types of closed-end fund structural leverage include borrowing and issuing debt and preferred shares. At the end of 2015, 316 funds had a total of $49.3 billion in structural leverage, with a little more than half (54 percent) of those assets from preferred shares (Figure 4.6). Forty-six percent of closed-end fund structural leverage was other structural leverage. The average leverage ratio* across those closed-end funds employing structural leverage was 26.0 percent at year-end 2015. Among closed-end funds employing structural leverage, the average leverage ratio for bond funds was somewhat higher (27.3 percent) than that of equity funds (22.0 percent).

* The leverage ratio is the ratio of the amount of preferred shares and other structural leverage to the sum of the amount of common assets, preferred shares, and other structural leverage.


Figure 4.6

Preferred Shares Comprised the Majority of Closed-End Fund Structural Leverage

Percentage of closed-end fund structural leverage, year-end 2015

Figure 4.6

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1A closed-end fund may issue preferred shares to raise additional capital, which can be used to purchase more securities for its portfolio. Preferred stock differs from common stock in that preferred shareholders are paid income and capital gains distributions, but do not share in the gains and losses in the value of the fund’s shares.
2Other structural leverage includes bank borrowing and other forms of debt.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2015”


Portfolio leverage results from particular portfolio investments, such as certain types of derivatives, reverse repurchase agreements, and tender option bonds. At the end of 2015, 183 closed-end funds had $18.9 billion outstanding in reverse repurchase agreements and tender option bonds (Figure 4.7).
 

Figure 4.7

Use of Portfolio Leverage

Billions of dollars; end of period, 2012–2014, 2015:Q1–2015:Q4

Figure 4.7

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Note: Portfolio leverage results from particular types of portfolio investments, including certain types of derivatives, reverse repurchase agreements, tender option bonds, and other investments or types of transactions. Data are only available for reverse repurchase agreements and tender option bonds. Given data collection constraints, and the continuing development of types of investments/transactions with a leverage characteristic (and the use of different definitions of leverage), actual portfolio leverage may be materially different from what is reflected above.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2015”

Characteristics of Households Owning Closed-End Funds 

An estimated 3.4 million U.S. households owned closed-end funds in 2015. These households tended to include affluent investors who owned a range of equity and fixed-income investments. In 2015, 92 percent of households owning closed-end funds also owned equity mutual funds, individual stocks, or variable annuities (Figure 4.8). Seventy-three percent of households that owned closed-end funds also held bonds, bond mutual funds, or fixed annuities. In addition, 51 percent of these households owned investment real estate.

Because a large number of households that owned closed-end funds also owned stocks and mutual funds, the characteristics of closed-end fund owners were similar in many respects to those of stock and mutual fund owners. For instance, households that owned closed-end funds (like stock- and mutual fund–owning households) tended to be headed by college-educated individuals and had household incomes above the national median (Figure 4.9).

Nonetheless, households that owned closed-end funds exhibited certain characteristics distinguishing them from mutual fund–owning households. For example, households with closed-end funds tended to have greater household financial assets (Figure 4.9). Also, 39 percent of households owning closed-end funds were retired from their lifetime occupations, making them more likely to be retired than households owning mutual funds.

Figure 4.8

Closed-End Fund Investors Owned a Broad Range of Investments

Percentage of closed-end fund–owning households holding each type of investment, mid-2015

   
Equity mutual funds, individual stocks, or variable annuities (total) 92
Bond mutual funds, individual bonds, or fixed annuities (total) 73
Mutual funds (total) 83
    Equity 78
    Bond  54
    Hybrid  51
    Money market  61
Individual stocks 72
Individual bonds 39
Fixed or variable annuities 42
Investment real estate  51

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Note: Multiple responses are included.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2015”


Figure 4.9

Closed-End Fund Investors Had Above-Average Household Incomes and Financial Assets

Mid-2015

  All U.S.
households
Households
owning
closed-end
funds
Households
owning
mutual
funds
Households
owning
individual
stocks
Median
Age of head of household1 51 53 51 52
Household income2 $50,500 $87,500 $87,500 $100,000
Household financial assets3 $75,000 $250,000 $200,000 $300,000
Percentage of households
      Household primary or co-decisionmaker for saving and investing
        Married or living with a partner 58 66 71 69
        Widowed 9 6 6 8
        Four-year college degree or more 32 53 51 54
        Employed (full- or part-time) 59 68 71 69
        Retired from lifetime occupation 28 39 26 29
    Household owns
        IRA(s) 32 63 61 62
        DC retirement plan account(s) 46 69 84 69

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1 Age is based on the sole or co-decisionmaker for household saving and investing.
2 Total reported is household income before taxes in 2014.
3 Household financial assets include assets in employer-sponsored retirement plans but exclude the household’s primary residence.
Source: ICI Research Perspective, “The Closed-End Fund Market, 2015”


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