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CEF funds

Are these considered a "good investment" or a gimmick that defies reality? If good, then how do they fare against standard mutual funds

Comments

  • Like regular mutual funds, most are bad and some are good. The question is too general, like asking "Are movies good to watch?" The two key differences to pay attention to with CEFs are discounts/premiums and leverage. I would suggest reading up more about the structure and asking instead about specific funds.
  • CEFs are the oldest form of funds around. But they are complex. So, followed mutual funds/OEFs, ETFs, interval-funds, etc. CEFs develop premiums/discounts and many are leveraged (so better know what you are doing). A newer development is CEFs with term-structures (PDO, TBLD, PAXS, etc), so there has been more than usual news on CEFs. Here is a good intro to them,
    https://www.icifactbook.org/21_fb_ch5.html
  • CEF Investing basics from Nuveen.

    Investing in Closed-End Funds: A Primer
  • edited March 3
    I’ve often thought of buying one - particularly something investing in a particular facet or blend of fixed income. Occasionally there’ll be a write up in the WSJ, Barron’s, etc. on some better ones. Sometimes they sell for a discount to book value (and sometimes for a premium).

    ISTM they wouldn’t be plagued with the same degree of inflows and outflows which can really hamper management of open ended funds. I suspect that’s playing havoc with some fixed income funds today as people head for the exits. Due diligence for sure. Definitely not a gimmick - but as with stocks or OEFs it’s easy to make a mistake and get burned. Likely something you’d plan on keeping a long while.
  • There are several CEFs which are listed as Great Owls, such as BST, BUI, ETO...etc. Patience is a virtue with CEF's, but when purchased at a discount they have the ability to generate a substantial amount of income, along with solid capital gains.
  • From my perspective, one needs to be a bit geeky or nerdy to get into CEFs. I tried and mostly disappointed myself. One advantage equity CEFs used to have was that they were the only game in town for certain asset classes, particularly sector, single-country, and EM funds. Nowadays, ETFs have taken over those market niches (and a lot more to boot). In my experience the allure of buying a CEF at a discount in hopes that the fund's NAV would rise and its discount would simultaneously shrink, thereby juicing the return, rarely worked out. Many funds have long histories of trading at perpetual discounts. To the credit of certain CEF companies, they have adopted periodic (i.e., quarterly) distribution schemes that can have the effect of shrinking the discount. Black Rock Health Sciences (BME) and the health funds run by Tekla (HQH, HQL, etc.) are ones I have owned. The net effect of a 7 or 8% distribution policy provides an equity-income experience for the investor who is holding a sector fund that may be more volatile than the broader market. While the CEF structure allows the PM to avoid undesired selling of assets during market downturns, the market prices of CEFs can be more volatile than the market when shareholders sell en masse. In other words, they drop like rocks. The clever investor can then swoop in and buy low; don't we all do that without failure? LOL
  • It is always said that CEFs do not have to deal with outflows forcing them to sell into a declining market. That is true but i have never seen a study comparing OEF and CEFs on this point.

    Unless you buy a discounted fund before it's liquidation is announced all the talk about "Getting $100 of stock for $80" is junk.

    M* lists the historical discounts for most CEFs and their averages. I would never buy an CEF unless it was below the average discount, but many sell for very large premiums.

  • That is why the newer term-structure CEFs are attractive. Their discounts WILL disappear after their specified terms. So, on selloffs, these can be accumulated with more confidence than the older CEFs some of which have persistent discounts. For more information on these, see https://ybbpersonalfinance.proboards.com/post/436/thread
  • @yogibearbull
    Interesting article. You mention PDI ( 6% premium today) and TBLD (6% discount)

    TBLD liquidates in 2033 so at least the discount will disappear.

    If it pays a high distribution, and therefore returns capital, what would that do to your returns?
  • @yogibearbull
    I also forgot to mention their ER are quite high 1.6 to 1.7%
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