Closed End Country Funds
A closed end fund is an investment vehicle that represents the shares in a certain (usually actively managed) portfolio. The shares of the fund are traded in the stock market as a stock would be – at a price determined by supply and demand for the shares. The shares cannot usually be redeemed for the underlying portfolio value, but can change hands by buying and selling the representative shares. Investing in a closed-end country fund provides exposure to the local market and international diversification.
Because the shares cannot be redeemed in exchange for the underlying portfolio, the value of the shares will not necessarily represent the net asset value of the portfolio. Instead, it will trade at a premium or discount value compared to the underlying portfolio. By contrast, open-ended funds have limited intra-day trading (investors must wait for the end-of-day net asset value to know how much they must pay to buy or will receive from selling) but will always be valued at the net asset value of the portfolio.
An advantage of the closed-end fund is that the fund manager needn’t focus on redemptions. The ability to redeem shares of an open-ended fund means managers must keep cash on hand to cover redemptions or must sell shares to meet redemptions. Either option can be inefficient at best and detrimental to other shareholders if the securities in the fund are illiquid. This advantage is a key reason why many emerging market funds (where shares are illiquid) are created as closed-end funds.
Because the closed-end fund can trade at a premium or a discount to net asset value, the closed-end fund shares can often be more volatile than the underlying portfolio. Since emerging markets are often volatile already, this can be a disadvantage for investors.
For more information, see all articles on: International Investing, Investing in Stocks, Investing in bonds See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
