Closed-end funds, the has-beens of the mutual-fund world, are getting a chance for a second life.
The flood of investment dollars into low-cost index funds has challenged many of Wall Street’s most expensive offerings, few more so than closed-end funds. In the decade after the financial crisis, assets under management doubled in stock and bond mutual funds but remained stagnant in closed-end funds, where the total in July stood at $254.7 billion. Annual average new-issue volume, meanwhile, fell from $13.2 billion in the decade ended in 2013 to $2 billion for the next five years, according to Dealogic.
But now some big-name fund managers, led by TIAA’s Nuveen andBlackRockInc.,the top two closed-end sponsors, are making moves to revive the sector, in part by revamping their structure. These moves include having the fund sponsors, not investors, pay the sales commissions that brokerage firms charge for selling the funds. New closed-end funds also come with term limits that give investors the option of getting out at par after a certain number of years.
Closed-end funds generally offer higher yields than open-end, often increased by borrowing, which also adds to risk. Those yields can be tempting in today’s low-rate environment. But average investors shouldn’t take the plunge without understanding the higher fees and risks. The average expense ratio for these funds, for example, is currently more than double the average for actively managed open-end funds, according toMorningstar.And the risks were on display in this year’s market plunge, when several energy funds were forced by their use of borrowing to sell assets or liquidate.