Closed End Funds
Closed End Funds
I recently inherited two Eaton Vance closed end dividend income mutual funds. I am wondering whether I should ask the broker to reinvest the dividends or take the dividends and invest them in something else? Perhaps I should I be thinking of selling these altogether? I need to rebalance the portfolio I inherited as it is 97% fixed income investments and I am in my mid 40's.
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Re: Closed End Funds
If you would not take cash on hand and buy the funds outright today, then the fact that you've inherited the position doesn't matter. If you would have purchased these on your own, then hold them. If you wouldn't have purchased them on your own, then sell them and purchase what you would have to fit into your overall portfolio. There's no advantage for inheriting them.
Generally CEFs are investments that have hidden and misunderstood risk/return characteristics. There are many investors that like them for their dividend payouts but that doesn't come risk free.
I would sell them.
Generally CEFs are investments that have hidden and misunderstood risk/return characteristics. There are many investors that like them for their dividend payouts but that doesn't come risk free.
I would sell them.
Re: Closed End Funds
If these are in a taxable account then automatically reinvesting the dividends will make calculating your cost basis very difficult when you eventually sell them.
Re: Closed End Funds
Probably the first thing you should do is take a close look at the funds, so to begin it's probably best not to re-invest the dividends, since that will only complicate things.
Instead take a close look and see if the CEFs are really the kind of investments you want to hold. Check the portfolio and its credit ratings. Look in particular at the expenses (often much higher than typical mutual funds), and also to see if they're leveraged (i.e. out on a limb). It's also worth checking the composition of distributions over the years to see how much of its "earnings" are really just return of capital (giving you your own money back while making it look like investment returns).
If you need to rebalance, and follow the usual wisdom around here to take risk on the equity side, then as long as the other components of the fixed-income side have lower risk, the CEFs would probably be good sell candidates.
Instead take a close look and see if the CEFs are really the kind of investments you want to hold. Check the portfolio and its credit ratings. Look in particular at the expenses (often much higher than typical mutual funds), and also to see if they're leveraged (i.e. out on a limb). It's also worth checking the composition of distributions over the years to see how much of its "earnings" are really just return of capital (giving you your own money back while making it look like investment returns).
If you need to rebalance, and follow the usual wisdom around here to take risk on the equity side, then as long as the other components of the fixed-income side have lower risk, the CEFs would probably be good sell candidates.
Re: Closed End Funds
I like the structure of closed-end funds. Mutual funds are very vulnerable to market crashes, since investors panic and sell their units. To give them their money, the fund must sell stocks on a falling market, and usually it can sell only its best stocks. So near the bottom, the fund has lost both money and stocks. A closed-end fund investors must sell on the market, so the underlying stock portfolio is not touched, and is better placed for recovery when the market comes back.
Of course, you can get the best of both worlds with EFTs, a bit like a closed-end fund, although as I was informed, it also has mechanisms for creating or destroying shares to match the index.
I come from Australia, where there was a closed-end fund craze a few years ago, with lots of these funds starting (Australians call them "Listed Investment Companies"). All the new ones had high expense ratios of >1%. But long before this craze, there were two closed-end funds called Australian Foundation Investment Company (AFIC) and Argo. They have been around for decades—AFIC even predates the Great Depression—had often outperformed the index for very long periods, and had management costs of ≤0.18%. They were also largely buy-and-hold, so didn't have the high-tax turnover of the mutual funds in Australia. While I was living there, the Vanguard-Australia group had higher expense ratios, which still are not as good as these old funds.
Edit: oops, I linked to the Institional ones, which are even harder to invest in than the Admiral funds in the US, requiring $500,000 minimum. For example, for ordinary investors, the Vanguard® Index Australian Shares Fund has an expense ratio of 0.75% p.a. for the first $50,000. So the expense advantage is non-existent for Australia, since this is actually 4x more expensive than the actively managed (but infrequently trading) closed-end funds above. So my argument is strengthened.
So in Australia, I would advise the "invest and forget" type of investors to invest in one or both of these funds. In America, it's hard to beat Vanguard, where I have almost all my investments.
Of course, you can get the best of both worlds with EFTs, a bit like a closed-end fund, although as I was informed, it also has mechanisms for creating or destroying shares to match the index.
I come from Australia, where there was a closed-end fund craze a few years ago, with lots of these funds starting (Australians call them "Listed Investment Companies"). All the new ones had high expense ratios of >1%. But long before this craze, there were two closed-end funds called Australian Foundation Investment Company (AFIC) and Argo. They have been around for decades—AFIC even predates the Great Depression—had often outperformed the index for very long periods, and had management costs of ≤0.18%. They were also largely buy-and-hold, so didn't have the high-tax turnover of the mutual funds in Australia. While I was living there, the Vanguard-Australia group had higher expense ratios, which still are not as good as these old funds.
Edit: oops, I linked to the Institional ones, which are even harder to invest in than the Admiral funds in the US, requiring $500,000 minimum. For example, for ordinary investors, the Vanguard® Index Australian Shares Fund has an expense ratio of 0.75% p.a. for the first $50,000. So the expense advantage is non-existent for Australia, since this is actually 4x more expensive than the actively managed (but infrequently trading) closed-end funds above. So my argument is strengthened.
So in Australia, I would advise the "invest and forget" type of investors to invest in one or both of these funds. In America, it's hard to beat Vanguard, where I have almost all my investments.
Last edited by jono64a on Mon Jan 21, 2013 8:08 pm, edited 1 time in total.
Re: Closed End Funds
Sometimes a closed-end fund will trade at a large discount, even taking into account the expense ratio. Some people find that attractive. Of course, there is no assurance that the discount on such a fund will narrow.
Re: Closed End Funds
That's a real problem, and affects the Aussie ones too. But AFIC and Argo have usually traded on a premium, much like the "Buffett premium" for BRK, since they have likewise consistently outperformed the Index for low expense.bsteiner wrote:Sometimes a closed-end fund will trade at a large discount, even taking into account the expense ratio. Some people find that attractive. Of course, there is no assurance that the discount on such a fund will narrow.
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Re: Closed End Funds
Closed-end funds (CEFs) appear to be fairly easy to understand when, in fact, they are very complex securities that are usually thinly traded, prone to investor over-reaction during market declines and provide the illusion of safe yield which serves as a magnet for "yield chasers" who often receive a return of their own investment as "yield."
I track CEFs as a measure of investor sentiment. On December 12, 2008, out of a total of 653 CEFs, 617 traded at a discount (the value of the underlying shares were worth more than the CEF). The median discount was 20.6%. Only 36 CEFs traded at a premium (the value of the underlying shares were worth less than the CEF).
On January 18, 2013, out of a total of 600 CEFs, 303 traded at a discount. The median discount was 5.5%. 297 traded at a premium.
The reaction of many CEF "investors" is highly predictable. Only the timing is uncertain. Whenever the next sustained market panic occurs (next week, next year or next decade) most CEFs will fall in price more than the overall market which will result in a rush to sell CEFs that were thought to be safe. When this occurs, the bid/ask spreads often widen and limit orders often get partial fills as prices tumble.
IMO, CEFs should only be purchased (or held) in the middle of a severe downturn after most "investors" have sold their shares in a panic. At all other times (including now) CEFs are an accident waiting to happen.
I track CEFs as a measure of investor sentiment. On December 12, 2008, out of a total of 653 CEFs, 617 traded at a discount (the value of the underlying shares were worth more than the CEF). The median discount was 20.6%. Only 36 CEFs traded at a premium (the value of the underlying shares were worth less than the CEF).
On January 18, 2013, out of a total of 600 CEFs, 303 traded at a discount. The median discount was 5.5%. 297 traded at a premium.
The reaction of many CEF "investors" is highly predictable. Only the timing is uncertain. Whenever the next sustained market panic occurs (next week, next year or next decade) most CEFs will fall in price more than the overall market which will result in a rush to sell CEFs that were thought to be safe. When this occurs, the bid/ask spreads often widen and limit orders often get partial fills as prices tumble.
IMO, CEFs should only be purchased (or held) in the middle of a severe downturn after most "investors" have sold their shares in a panic. At all other times (including now) CEFs are an accident waiting to happen.
Re: Closed End Funds
It might help if OP (cpnyc) could name the funds, such as by stock ticker.
If you choose to sell, be sure your broker doesn't charge a % of trade as a commission. If so, instead it might be sensible to transfer the account or just the funds to another broker, such as Vanguard's, Fidelity, etc, who have reasonable flat fees up to xxxx shares, and possibly a few cents per share over that--depending on the broker. A reasonable fee to trade up to 1000 shares is $0 to $15 in my opinion, if you don't want to pay the broker for advice.
If you choose to sell, be sure your broker doesn't charge a % of trade as a commission. If so, instead it might be sensible to transfer the account or just the funds to another broker, such as Vanguard's, Fidelity, etc, who have reasonable flat fees up to xxxx shares, and possibly a few cents per share over that--depending on the broker. A reasonable fee to trade up to 1000 shares is $0 to $15 in my opinion, if you don't want to pay the broker for advice.