CHICAGO (Reuters) – Investors chasing yield in this low-rate environment are jumping into alternative vehicles. That’s helping closed-end income funds stage a comeback.
Such funds, which offer a fixed number of shares and are closed to new capital once they start operating, have their attractions, but investors should exercise caution. Expenses for closed-end funds tend to be higher than with exchange-traded funds, they are more complex and they usually carry more risk. Their active managers are free to use leverage and invest in a variety of assets in the hope of delivering higher returns than mutual funds with static bond mixes.
In 2008, initial public offerings of closed-end mutual funds fell off sharply, to just one, from about 30 the year before. They fell out of favor because of the market meltdown and other debacles. There were 11 in 2009, 12 in 2010, four in 2011 and 13 last year, according to Lipper, a Thomson Reuters company.
This year so far, there have been eight closed-fund IPOs – six in the first quarter alone, all of them income-oriented – raising some $5 billion. There are more on the way, according to Investment News.
Leading the pack is the Pimco Dynamic Credit Income Fund (PCI), which raised $3 billion for the world’s largest bond-fund manager.