Why Invest in Closed-end Funds?

The closed ended nature of trusts allows the fund manager the flexibility to manage a fixed pool of assets largely free from the distractions of investor inflow and outflows

David Holder 23 October, 2015 | 2:30PM
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Morningstar approach the analysis of Closed Ended Funds (Investment Trusts) with the same vigour and methodology that we apply to any other investment strategy and we feel very strongly that they can and should play a central role in many client portfolios. There is much to like about the structure when compared to other types of investment vehicles such as Unit Trust and OEICs.

The closed ended nature of the vehicle allows the fund manager the flexibility to manage a fixed pool of assets largely free from the distractions of investor inflow and outflows. This is a definite advantage when it comes to investing in less liquid asset classes and arguably allows the fund manager to pursue a purer form of his investment philosophy than might be possible in an alternative open ended investment vehicle.

Other key advantages include the potential effect of gearing although this can work adversely, the generally competitive fees charged by many Investment Trusts and the oversight and advice given from an independent board. Of course the structure of the investment vehicle will largely be irrelevant if the fund manager lacks the ability or resource to be able to add value over and above his relevant benchmark over the longer term.

Another key advantage of the structure is that through the utilisation of the revenue reserve a fund manager can smooth the provision of income through volatile market conditions. For example City of London (CTY) and Witan (WTAN) have increased the annual dividends received by their shareholders for 49 and 40 years respectively. These vehicles are perfect for those investors seeking the surety of a sustainable, rising and regular income together with the prospect of some capital growth.  

Trading at a Discount or Premium

Movements in the share price relative to the NAV both stand as a warning and opportunity to investors who choose to invest via Investment Companies. In times of market stress or when sectors fall out of favour it can provide investors with once in decade opportunity to access a pool of quality assets at attractive valuations. Of course the opposite is also true in that it makes little sense in over paying for a pool of assets and history has demonstrated that whilst premia can persist they generally do not last forever.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
City of London Ord434.50 GBX-0.80Rating
Witan Ord275.50 GBX1.29Rating

About Author

David Holder  is a senior investment research analyst at Morningstar

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