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Closed End Mutual Funds

Asset Management Staff on

Posted in  Funds, Closed Funds, Sectors, Costs

Closed-End Mutual Funds (CEF)

Closed-end mutual funds (CEFs) are rarely used by retail or institutional investors. CEFs are a portfolio of securities that pay out dividends and capital gains, but you cannot redeem shares on a daily basis and the number of shares issued by the CEF is fixed. Generally speaking, most of the CEFs on the market were created in the '80s and few have been created in recent years. CEFs are publicly traded investment companies, regulated by the SEC. Once the IPO is subscribed, there are no additional shares available other than on the secondary market. CEFs are usually specialized portfolios of securities that specialize in a specific industry or sector. Like open-end mutual funds, CEFs have management costs that are reported as expense ratios. According to Fidelity:

All CEFs must report their expense ratios according to a formula set forth by the Securities and Exchange Commission. The expense ratios are expressed as a percentage of average net assets. Most leveraged CEFs levy management fees against total assets, not just net assets, though this is not considered a best practice. Doing so results in higher management fees. A management fee of 0.50% on a $500 million unleveraged fund is $2.5 million. If there is an additional $250 million in leverage, the fund provider can rake in an additional $1.25 million. The argument that it would cost more to manage a $750 million leveraged portfolio versus a $500 million unleveraged fund does not hold water. Investment management is a highly scalable business, meaning higher assets under management do not correlate highly with additional costs. Because such funds levy fees against total assets but must report expense ratios against net assets, their expense ratios are typically relatively high.

At TrueStar Advisors, not only do we not increase the cost for leverage, we do not use leverage or charge an "Assets Under Management" commission (yes, it's a commission, not a fee when it's discriminatory). Our individual stock sector portfolios make more and more sense the more you know.

**Reference: **

“Closed End Fund Expense Ratio - Fidelity.” How Mutual Funds, ETFs, and Stocks Trade - Fidelity, Fidelity , 2012

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