Closed Until Open funds

05-Nov-2009 | kate | Funds

As our daily readers can tell, a lot of my blog articles result from conversation with my clients, and today is no exception. I had a late meeting early this week, where a potential client came in to discuss her investments held at another institution. Similar to most people who invest at their bank, she had a mine field of mutual funds and wanted to someone else to attempt to explain what all the terms meant. Through out our conversation, one mutual fund that stuck out to me, was the closed until opened fund.

A closed until open mutual fund, works pretty much like the name implies.  The fund starts out as a closed-end fund for a few years, and then converts into mutual fund (open-ended) down the road.

Back to the meeting; my potential client was confused by this statement since she assumed a closed end fund, was a mutual fund. She was beginning to get lost. So it was time to get back to the basics.

A closed end fund is a pool of capital that is sold to the public through the formal issuance process, and closed to all new investments after that. The only way that you can buy or sell the fund, is through the stock exchange. Basically there are a finite amount of units to purchase, and for every seller their must be a buyer on the other side. Trading on the stock exchange allows the buyer of the fund to get real time prices, instead of waiting for the NAV at the end of the day. Closed end funds are advantageous to the fund manager since their don’t have to worry about redemptions, thereby allowing them to take a longer term view so they can buy less liquid investments like infrastructure and real estate.

Historically, closed end funds tend to have lower ongoing management fees that other products but cost more to initially invest in due to the cost of bringing the fund to the market.  One site suggested that on average for every one dollar spent to buy the fund, only 93 cent is invested.

Traditionally, closed end funds were marketed as specialized investment tools designed to target specific niches. Today, however some funds are being marketed and misunderstood as front end mutual funds containing trailer fees, redemption features and eventually being opened to new investors.

Today, closed until open funds are appearing to be launching pads for mutual funds and ETF’s, starting as a closed end fund to allows the costs of the fund to be passed on to the initial unit holder- a great option for the fund company, not so great for the original investors.

While some other advisors might say that the market conversion feature is a great tool, it actually limits market return for the initial purchaser of the IPO. The buyer of a closed end fund will have to have some compelling reason to why they believe this fund will perform 7% (the initial investment lost to listing fees) better than any other tool out there, to make a case for buying into a new closed end fund, over another investment.

Of course, this is just the tip of the ice berg why closed-until-opened funds may not be the best investment out there for you, but it does highlight one of the major issues. Remember that when you’re investing it is important to understand what you are getting yourself into, so it is important to ask lots of question and research the company through sites like Retire First Top Picks and the Retire First Blog for information on investment tools and products.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

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Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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