Closed-end funds offer clients advantages that many are not using because advisors do not fully understand the funds, says Anne Kritzmire of Nuveen Investments.
Because of their unique structure, a set pool of shares that offers stability, closed-end funds can offer investors a steadier stream of income, yet only about half of advisors are using them in some of their clients’ portfolios, says Kritzmire, Nuveen’s managing director of closed-end funds and global structured products.
“Closed-end funds are one of the most efficient investments for growing and sustaining ongoing income -- something especially important to those living in retirement,” she says.
“But advisors are overwhelmed with information, and they may not understand closed-end funds,” she adds. Research by Nuveen Investments has shown the most common reason advisors do not use closed-end funds is that they lack knowledge about the product.
Because closed-end funds are limited to the initial offering, investors are buying from or selling to a limited pool of owners, which can limit the liquidity of the investment. But because no more shares are being issued, the funds are also more stable than other investments, says Kritzmire.
Three-quarters of closed-end fund investments involve at least a modest amount of leveraging. The firm offering the funds borrows against the shares issued and investors reap the returns from the borrowed money minus the cost of borrowing, Kritzmire says. National, state and municipal closed-end funds also offer tax advantages.
Closed-end funds also can offer access to alternative asset classes, which helps investors diversify their portfolios.
“When advisors hear a little about closed-end funds, they want to know more, and we are trying to address that with our advisors,” Kritzmire says. Nuveen produces a guide to closed-end funds and self-taught courses through its website.