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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 (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 closed-end fund shares 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 reinvestment. 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 2013, 599 closed-end funds had total assets of $279 billion (Figure 4.1). 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. Although total assets at year-end 2013 were up nearly 6 percent ($15 billion) from year-end 2012, they have not fully recovered to the 2007 peak of $312 billion. Three factors have limited the growth in both the assets and the number of closed-end funds in recent years. First, 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. Second, a few closed-end funds have liquidated each year and others have converted into open-end mutual funds or ETFs. Third, closed-end fund preferred share assets have declined since the financial crisis of 2008.

Historically, bond funds have accounted for a large share of assets in closed-end funds. A decade ago, 75 percent of all closed-end fund assets were held in bond funds, and the remaining 25 percent were held in equity funds (Figure 4.2). At year-end 2013, assets in bond closed-end funds were $165 billion, or 59 percent of closed-end fund assets. Equity closed-end fund assets totaled $114 billion, or 41 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 seven years. In addition, total returns on U.S. stocks* averaged 8.1 percent annually from year-end 2003 to year-end 2013, while total returns on bonds averaged 4.7 percent annually.

* Measured by the Wilshire 5000 Total Market Index.
Measured by the Citigroup Broad Investment Grade Bond Index.

Figure 4.1

Total Assets of Closed-End Funds Increased to $279 Billion at Year-End 2013

Billions of dollars; year-end, 2003–2013

Figure 4.1

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Figure 4.2

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

Percentage of closed-end fund total assets, year-end 2003 and 2013

Figure 4.2

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Net Issuance of Closed-End Funds

In the past four years, net issuance of closed-end funds has been bolstered by increased investor demand for new shares and a slowdown in redemptions of preferred shares. Net issuance of closed-end fund shares was $10.1 billion for 2013, about the same as in the previous year, but substantially more than in 2010 and 2011 (Figure 4.3).

Figure 4.3

Closed-End Fund Net Share Issuance1

Millions of dollars, 2007–20132

  Equity Bond
  Total 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 -2,759 -2,020 -1,866 -154 -739 -788 -238 287
2010 5,520 2,054 1,995 59 3,466 1,990 1,119 357
2011 6,018 4,466 3,206 1,260 1,551 724 825 2
2012 10,492 2,936 2,840 96 7,556 3,249 2,226 2,081
2013 10,107 3,355 3,898 -543 6,752 3,933 -159 2,978

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1 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.
2 Data are not available for years prior to 2007.
Note: Components may not add to the total because of rounding.

Net issuance of bond closed-end funds, most of which occurred in the first half of the year, accounted for two-thirds ($6.8 billion) of total net issuance in 2013. Bond closed-end fund net issuance fell off in the second half of the year as investors started pulling back from fixed-income securities. Bond prices fell and long-term interest rates rose, as market participants anticipated that the Federal Reserve was contemplating tapering back its large-scale monthly bond buying program. Domestic taxable bond funds were popular, with $3.9 billion in net issuance, followed by global/international bond funds with $3.0 billion. Domestic municipal bond funds had net redemptions of $159 million.

Net issuance of closed-end equity funds amounted to $3.4 billion in 2013, up from $2.9 billion in the previous year. As in the previous four years, net issuance of domestic equity closed-end funds accounted for the bulk of the equity fund net issuance.

Closed-End Fund Distributions

In 2013, closed-end funds distributed $16.3 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 74 percent of closed-end fund distributions, with the majority of income distributions paid by bond closed-end funds. Return of capital comprised 14 percent of closed-end fund distributions, and capital gains distributions accounted for 12 percent.

Figure 4.4

Closed-End Fund Distributions

Percentage of closed-end fund distributions, 2013

Figure 4.4

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Note: Income distributions include payments from interest and dividends.

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 2013, at least 391 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; quarterly, 2012–2013

Figure 4.5

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1Structural leverage affects the closed-end fund’s capital structure by increasing the fund’s portfolio assets through borrowing and issuing debt and preferred stock.
2
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.
Note: Components do not add to the total because funds may employ both structural and portfolio leverage.

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 2013, 337 funds had a total of $48.6 billion in structural leverage, with a little more than half (56 percent) of those assets from preferred shares (Figure 4.6). Forty-four percent of closed-end fund structural leverage was other structural leverage. The average leverage ratio* across those closed-end funds employing structural leverage was 27.2 percent at year-end 2013. Among bond funds employing structural leverage, the average leverage ratio was somewhat higher (29.3 percent) than that of equity funds (19.8 percent) employing structural leverage.

* 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 2013

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.
2 Other structural leverage includes bank borrowing and other forms of debt.

Portfolio leverage is leverage that results from particular portfolio investments, such as certain types of derivatives, reverse repurchase agreements, and tender option bonds. At the end of 2013, 214 closed-end funds had $17.6 billion outstanding in reverse repurchase agreements and tender option bonds (Figure 4.7).

Figure 4.7

Use of Portfolio Leverage

Billions of dollars; quarterly, 2012–2013

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. 

Characteristics of Households Owning Closed-End Funds

An estimated 3.8 million U.S. households owned closed-end funds in 2013. These households tended to include affluent, experienced investors who owned a range of equity and fixed-income investments. In 2013, 96 percent of households owning closed-end funds also owned equities, either directly or through equity mutual funds or variable annuities (Figure 4.8).

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, May 2013

Equity mutual funds, individual equities, or variable annuities (total) 96
Bond mutual funds, bonds, or fixed annuities (total) 68
Mutual funds (total) 91
   Equity mutual funds 88
   Bond mutual funds 50
   Hybrid mutual funds 40
   Money market funds 60
Individual equities 77
Individual bonds 23
Fixed or variable annuities 43
Investment real estate 43

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Note: Multiple responses are included.

Sixty-eight percent of households that owned closed-end funds also held bonds, bond mutual funds, or fixed annuities. In addition, 43 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 owners were similar in many respects to those of equity and mutual fund owners. 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 median (Figure 4.9).

Nonetheless, households that owned closed-end funds exhibited certain characteristics distinguishing them from equity- and mutual fund–owning households. For example, households owning closed-end funds tended to be slightly older (median age 54) than households owning either individual equities or mutual funds (both with a median age of 52) (Figure 4.9). Households with closed-end funds tended to have significantly greater household financial assets than either equity or mutual fund investors. Nearly 40 percent 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.

Figure 4.9

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

May 2013

  All U.S.
households
Households
owning
closed-end
funds
Households
owning
mutual
funds
Households
owning
individual
equities
Median
Age of head of household1 51 54 52 52
Household income2 $50,000 $94,000 $80,000 $90,000
Household financial assets3 $75,000 $500,000 $200,000 $300,000
Percentage of households
Household primary or co-decisionmaker for saving and investing
Married or living with a partner 63 77 76 75
Widowed 11 8 7 8
Four-year college degree or more 33 50 47 52
Employed (full- or part-time) 57 67 69 67
Retired from lifetime occupation4 30 38 28 32
Household owns
IRA(s) 38 80 63 65
DC retirement plan account(s) 53 76 85 76

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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 2012.
3 Household financial assets include assets in employer-sponsored retirement plans but exclude the household’s primary residence.