Closed-end companies

 
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Closed-end companies

Sometimes called closed-end funds, are pools of assets, that seek the economies of scale. This little known investing type, will include professional management, diversification, transparency, as well as lower costs. No provision is made for advertising, or educating the public. Closed-end companies are not designed, or priced for dissolution.

  • Closed-end investment company’s do not continuously offer shares to the public. Capital is raised by rights offerings, to existing shareholders.
  • Closed-end companies can influence the net asset value, but this is not of great concern to investors.
  • Closed-end companies are permitted to invest in unlisted securities, which may not have a liquid market.
  • Closed-end companies are not required to buy its shares back from investors upon request.
  • Portfolios of closed-end companies are managed by separate investment advisers, who do not benefit from the continuous buying and selling of the funds assets, like mutual funds.
  • Closed-end companies will not wait to remove securities that do not meet the funds objectives, like those held in indexes.
  • The public knows little about close-end companies. Brokers have a conflict of interest offering closed-end companies, instead of their own mutual funds.
  • Closed-end companies selling at a discount below net-assets-value, may be selling closer to the true liquidation value of the assets.
  • Pass through taxing is allowed when essentially all of the funds realized income, and capital gains, is paid to shareholders each year.
  • A company that must cast off all of its returns, will not show the full benefits of growth, compared to a company that retains earnings in its price. Closed-end company’s charts should have all distributions, reinvested, and compounded, to compare results fairly.

Investors should carefully read all of a fund’s available information, including its prospectus, and most recent shareholder report, before putting assets into a closed-end fund. [1] Examples of closed-end funds with the widest investment horizons EMF, and MSF.

References

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