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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, 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 closed-end fund shares fluctuates like that of other publicly traded securities and is determined by supply and demand in the marketplace.

Closed-end funds offer a fixed number of shares to investors during an initial public offering. Closed-end funds also may make subsequent public offerings of shares in order to raise additional capital. Once issued, the shares of a closed-end fund typically are not purchased or redeemed directly by the fund. Rather, they are bought and sold by investors in the open market.

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. Closed-end funds also have limited flexibility to borrow against their assets, allowing them to use leverage on a restricted basis as part of their investment strategy.

Total Net Assets of Closed-End Funds

Total net assets of closed-end funds increased to $265 billion at year-end 2012, up 9 percent from year-end 2011 but still below the high of $312 billion in assets at year-end 2007 (Figure 4.1). Closed-end fund assets have increased by $106 billion, on net, over the past decade.

Figure 4.1

Closed-End Fund Total Net Assets Increased to $265 Billion

Billions of dollars, year-end, 2002–2012

Figure 4.1

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Note: Components may not add to the total because of rounding.

Historically, bond funds have accounted for a large share of assets in closed-end funds. In 2002, 79 percent of all closed-end fund assets were held in bond funds, while the remainder was held in equity funds (Figure 4.1). At year-end 2012, assets in bond closed-end funds were $163 billion, or 62 percent of closed-end fund assets (Figure 4.2). Closed-end equity funds totaled $101 billion, or 38 percent of closed-end fund assets. These relative shares have shifted over time, in part because issuance by equity closed-end funds exceeded that of bond closed-end funds for every year from 2004 through 2008 (Figure 4.3).

Figure 4.2

Bond Funds Were the Largest Segment of the Closed-End Fund Market

Percentage of closed-end fund total net assets, year-end 2012

Figure 4.2

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Proceeds from issuance of closed-end funds totaled $14.9 billion in 2012, about the same as in the previous year (Figure 4.3). In 2012, issuance of closed-end bond funds totaled $10.7 billion, of which $8.6 billion—or about 58 percent of total issuance—was domestic bond funds. The remaining $4.1 billion in proceeds was from issuance of closed-end equity funds. Eighty-eight percent of equity closed-end fund issuance was from domestic equity closed-end funds.

Despite strong issuance over the past three years and solid returns in equity and bond markets, total net assets of closed-end funds have not fully recovered to their 2007 peak of $312 billion (Figure 4.1). The explanation for this apparent disconnect between issuance and total net assets is twofold. First, several closed-end funds have offered to buy back a portion of shares outstanding through tender offers over the past few years, and these purchases necessarily reduced the size of assets under management. Second, a few closed-end funds have liquidated each year and others have converted into open-end mutual funds or ETFs. These trends have limited the growth in both the assets and the number of closed-end funds in recent years.

Figure 4.3

Closed-End Fund Share Issuance

Proceeds from the issuance of initial and additional public offerings of closed-end fund shares, millions of dollars, 2002–2012

  Equity Bond
  Total Domestic Global/International Domestic Global/International
2002 $24,895 $9,191 $3 $15,701 $0
2003 40,810 11,187 50 28,541 1,032
2004 27,991 15,424 5,714 5,825 1,028
2005 21,388 12,559 6,628 2,077 124
2006 12,745 7,992 2,505 1,914 334
2007 31,086 5,973 19,764 2,654 2,695
2008 275 8 145 121 0
2009 3,615 549 485 2,265 317
2010 13,975 3,719 114 9,785 358
2011 14,945 3,805 1,469 9,669 2
2012 14,855 3,615 516 8,644 2,081

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Note: Components may not add to the total because of rounding.

Number of Closed-End Funds

The number of closed-end funds available to investors remains below its peak of 663 at the end of 2007 due to the effects of mergers, liquidations, and conversions (Figure 4.4). At the end of 2012, there were 602 closed-end funds, down 30 from 632 in 2011 but up from 544 at the end of 2002. Bond funds were the most common type of closed-end fund, accounting for 65 percent of the total number of funds. Municipal bond funds represented 37 percent of all closed-end funds in 2012. Equity funds made up 35 percent of the total number of closed-end funds.

Figure 4.4

Number of Closed-End Funds

Year-end, 2002–2012

Figure 4.4

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Closed-End Fund Preferred Shares

Closed-end funds 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. This strategy, known as leveraging, is intended to allow the fund to produce higher returns for its common shareholders. Closed-end funds that issue preferred shares are subject to the Investment Company Act’s asset coverage requirements. For each $1.00 of preferred shares issued, the fund must have $2.00 of assets at issuance and dividend declaration dates (commonly referred to as 50 percent leverage). At year-end 2012, 11 percent of the $265 billion in closed-end fund assets were preferred shares (Figure 4.5). Closed-end bond funds accounted for 91 percent of outstanding preferred share assets.

Figure 4.5

Bulk of Closed-End Fund Total Net Assets Was in Common Share Classes

Billions of dollars, year-end, 2002–2012

Figure 4.5

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1All closed-end funds issue common stock, also known as common shares.
2A 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 dividends but do not share in the gains and losses of the fund.
Note: Components may not add to the total because of rounding.

Characteristics of Households Owning Closed-End Funds

An estimated 1.9 million, or 2 percent of, U.S. households held closed-end funds in 2012. These households tended to include affluent, experienced investors who owned a range of equity and fixed-income investments. In 2012, 92 percent of households owning closed-end funds also owned equities, either directly or through equity mutual funds or variable annuities (Figure 4.6). Seventy-three percent of households that owned closed-end funds also held bonds, bond mutual funds, or fixed annuities. In addition, 56 percent of these households owned investment real estate. Because a large number of households that owned closed-end funds also owned equities and mutual funds, the characteristics of closed-end fund–owning households were similar in many respects to those households owning equities and mutual funds. For instance, households that owned closed-end funds—like equity- and mutual fund–owning households—tended to be headed by college-educated individuals and had household incomes above the national average (Figure 4.7).

Figure 4.6

Closed-End Fund Investors Owned a Broad Range of Investments

Percentage of closed-end fund–owning households holding each type of investment, May 2012

Equity mutual funds, individual equities, or variable annuities (total) 92
Bond mutual funds, bonds, or fixed annuities (total) 73
Mutual funds (total) 81
   Equity mutual funds 70
   Bond mutual funds 66
   Hybrid mutual funds 50
   Money market funds 51
Individual equities 83
Bonds 37
Fixed or variable annuities 46
Investment real estate 56

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Note: Multiple responses are included.


Figure 4.7

Characteristics of Closed-End Fund–Owning Households

May 2012

  All U.S.
households
Households
owning
closed-end
funds
Households
owning
mutual funds
Households
owning
individual
equities
Median
Age of head of household1 50 61 51 53
Household income2 $50,000 $113,600 $80,000 $87,500
Household financial assets3 $62,500 $500,000 $190,000 $250,000
Percentage of households
Household primary or co-decisionmaker for saving and investing
Married or living with a partner 61 68 75 73
Widowed 10 11 6 7
Four-year college degree or more 31 62 49 52
Employed (full- or part-time) 58 57 72 66
Retired from lifetime occupation4 30 49 25 30
Household owns
IRA(s) 40 71 68 69
DC retirement plan account(s) 51 48 80 74

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1Age is based on the sole or co-decisionmaker for household saving and investing.
2Total reported is household income before taxes in 2011.
3Household financial assets include assets in employer-sponsored retirement plans but exclude the household’s primary residence.
4The head of household was considered retired if they responded affirmatively to the question: “Are you retired from your lifetime occupation?”

Nonetheless, households that owned closed-end funds exhibit certain characteristics that distinguish them from equity- and mutual fund–owning households. For example, households owning closed-end funds tended to be older (median age 61) than households owning either individual equities (median age 53) or mutual funds (median age 51) (Figure 4.7). Households with closed-end funds tended to have much greater household financial assets than either equity or mutual fund investors. Nearly half of closed-end fund–owning households were retired from their lifetime occupations, making them more likely to be retired than households owning either individual equities or mutual funds.


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