While many parts of the mutual fund industry seem to have recovered, closed-end funds still face troubles that range from increased competition to the lingering effects of the 2008 crisis.
Investment dollars in open-end mutual funds and exchange-traded funds are at or above precrisis levels, according to Investment Company Institute data. Assets in closed-end funds have bounced back some too, but at $243 billion they are still roughly one-fourth below their 2007 peak.
Closed-end funds are vehicles whose shares trade like stocks, often at prices that float far above or below the value of their holdings. Analysts and industry executives stress that the business is picking up, but the funds have had a hard time finding investors to buy new shares. Funds issued just $8 billion in new shares in 2010, compared with $31 billion in 2007.
During a rush to sell amid the financial crisis, many closed-end funds traded at prices more than 20% below the value of their holdings. Those big discounts have narrowed sharply, but funds still trade at average discounts of about 3%, according to Herzfeld data. Fear of a quick haircut has made many investors shy away from buying funds at their IPOs.
One of the financial crisis' early scandals, which indirectly embroiled closed-end funds, is also a factor. Many closed-end funds invest borrowed money obtained through auction-rate preferred shares, only to face pressure to rescue aggrieved investors by redeeming the shares. More recently, they've had to experiment with new ways to magnify their returns.
Meanwhile, investors who might have bought closed-end funds a decade ago have many new options. In the past, closed-end funds thrived by giving investors access to exotic strategies and investments that open-end funds had trouble targeting, according to the independent fund analyst Geoffrey Bobroff. Now, newer vehicles like exchange-traded funds and exchange-traded notes have muscled into this territory.
