A troubled cousin
The closed-end fund, an investment cousin of the mutual fund, became a booming product category for a handful of investment companies in recent years. Now the funds that promised higher income are giving individual investors an up-close experience in market volatility.
Few companies cranked out new closed-end funds like Eaton Vance Corp. of Boston, which raised many billions to manage and set a record in March with a new income fund that attracted $6 billion. Other Boston financial firms, including Pioneer Investments and Evergreen Investments, raised big money of their own with new income-oriented closed-end funds.
The newer funds were hot because they aimed to produce as much as 9 percent a year in income for shareholders. But most of them have been slammed in the waves of broader market volatility over the past six weeks, typically losing 15 to 20 percent of their value from summertime peaks, far exceeding setbacks experienced in conventional fixed-income mutual funds.
A sample of the damage:
The Eaton Vance Tax-Managed Global Diversified Equity Income Fund, the one that raised so much money in March, has lost 16 percent of its value since July 13. The Pioneer Diversified High Income Trust, created just three months ago, has plunged 22 percent since the end of June. The Evergreen Global Dividend Opportunity Fund, launched at the end of March, has sunk 20 percent since the July 4 holiday.
Al Blomquist, editor of The Closed-End Reader newsletter, says most investors should sit tight with their closed end investments. "I would encourage people to hold their positions," he said.
Those closed-end funds are different from mutual funds in a few important ways. Mutual funds accept new cash from investors every day and issue fund shares in return. The funds also send cash back to investors when they want to redeem their shares. The price of the fund's shares is calculated every day, based on the value of the investments it holds.
A closed-end fund raises money by selling shares in an initial public offering, just like a company that hits the market with an IPO. The money raised stays with the fund to be managed year after year. Shareholders who want to cash out don't ask the fund to redeem their shares. They sell the stock to other investors, just as they would sell shares of a company like General Electric Co.
Those shares can trade on the open market at prices above or below the actual value of the assets managed by the fund, depending on the appetite of buyers. Many closed-end funds traded at a premium to their assets, but have dropped to discounts of 10 percent or more to those assets.
Closed-end funds are exposed to a kind of double whammy when fear grips financial markets. The value of the fund's investments come under pressure, and then the price of its shares can get hurt if no one wants to buy them.
"Obviously, there's been a mass rush to the exits, which has sent [close-end fund shares] down much lower than their asset value, which is frankly illogical," says Jonathan Isaac, a closed-end fund executive at Eaton Vance.
Investment executives at companies that operate closed-end funds say the funds themselves are performing well, even if the stocks are not. "We're very comfortable with the manager, and we're comfortable with the underlying assets of the fund," Evergreen chief executive Dennis Ferro said of the closed-end fund his company launched in March.
