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Written by Brendan Coffey

Smart investors focus on having a well-balanced portfolio allocated among various sectors and asset classes without ignoring the potential cost of fees, taxes and turnover.

 A Forbes Insights survey of 500 investors and 500 financial professionals found that 38% of investors want to refocus on finding more value in their portfolio, more than 28% want diversity beyond stocks and bonds and nearly 28% want to boost the actively managed holdings in their accounts. For more on the research, explore an infographic highlighting key survey takeaways.

 Closed-end funds (CEFs)—actively managed funds traded like a stock and designed to pay out regular income—can meet those objectives and more. “The dominant reason investors consider closed-end funds is because of their strong income and distribution characteristics,” says Bill Meyers, head of CEF business development at Nuveen. “[There’s] an increasing number of retiring Baby Boomers as well as a large group of income investors looking to fund their cash flow needs. For these investors, CEFs offer an attractive opportunity to supplement and potentially elevate the income generated by their current portfolios.”

Below, learn how this time-tested fund category can fit into the investing strategies of five types of investors and financial professionals and provide unique benefits for each.

Income-focused investors often get the best of both worlds: Regular income provides money for other needs or for reinvesting to compound growth. The challenge with the income approach today is that interest rates and bond yields sit at or near record lows, so finding attractive income is harder.

CEFs are designed to pay out distributions to shareholders regularly, often monthly, and frequently offer higher distributions than more traditional income investments. The managers who run CEFs have a few ways of doing this. They buy assets other investors may be unable to invest in due to liquidity and size restrictions, use leverage to magnify holdings and use covered calls to earn income off their holdings. The trade-off for potentially superior income is that CEFs can be riskier than some income investments. Within the diverse universe of about 490 CEFs, however, investors should be able to discover funds that match their risk tolerance. To learn more, explore this article on CEFs’ potential for income.

Everybody loves a bargain. CEFs may fit a value investor’s criteria in a couple of ways. CEFs are “closed,” meaning they don’t create and eliminate shares as investors buy and sell the fund. As a result, managers don’t worry about raising cash to meet daily redemptions, so they can more fully invest the portfolio, including in securities that are less liquid and offer higher returns, such as private placements, real estate and alternative securities. The other appealing feature for value-seekers is that CEFs can trade at a discount to their net asset value.

Every investment carries the risk that its price could fall, and CEFs are no different. Still, buying CEF shares at a discount can offer opportunities to potentially profit from share price appreciation. 

Investors focused on retirement planning or those in retirement already can find CEFs’ regular distributions a vital part of their investing strategy. Since retirement strategy is often designed around generating income to live on while preserving capital, CEFs’ focus on paying out regular distributions to shareholders can fit nicely into a well-designed portfolio.

At the same time, CEFs don’t lock up your capital because shares trade on a stock exchange, offering investors the opportunity to sell their shares during the trading day. CEF managers do aim for long-term appreciation while balancing income distribution to shareholders, meaning that sustaining the share price over time is a goal, too.

While fund information site CEF Connect reports there are more than 300 CEFs dedicated to fixed-income investing, which are often preferred by investors who are at or near retirement, the survey finds that investors 55 and older are the least aware of CEFs: 35% say they are unaware of CEFs compared with 10% from younger age groups.

Long term, taxes paid on investing gains can be a significant drag on a portfolio. Investors who want assets in tax-favored holdings have attractive options with CEFs. For one, most CEFs are municipal bond funds, whose interest is federally tax-exempt. Also, their active management component allows fund managers to strategize so that payouts are usually long-term capital gains.

There are also benefits for investors looking to simplify tax accounting. For example, master limited partnerships (MLPs) pay out a high percentage of cash flow to unit-holders. That’s why many investors own them. Yet owning MLPs directly requires managing K-1 forms and multiple state tax returns at tax time, all requiring details about cost basis and return of capital. A CEF that owns MLPs handles the K-1s and provides your tax information on the simpler 1099 form. For most investors, buying solely for tax planning shouldn’t be the primary consideration, but for options that match your core requirements, CEFs can be a surprisingly tax-efficient consideration.

Financial professionals face plenty of competitive pressure to prove their value. In fact, 73% of financial professionals surveyed say they’ve adjusted their business to demonstrate their value to clients in response to robo-advisors and passive investing. Nearly 1 in 5 financial professionals say they’ve lost clients to cheaper or self-guided options, while 26% say their ability to charge a fair premium has been affected. 

Understanding and communicating the unique, often overlooked benefits of CEFs can help demonstrate a financial professional’s value to clients. Given their overall variety and many strategy, tax and risk nuances, CEFs are an ideal opportunity for financial professionals to use their expertise to inform clients of an appropriate and personalized investment. According to Nuveen data, financial professionals who use CEFs have longer client relationships and those clients are more satisfied. Yet survey findings show that nearly half (49%) of investors who use financial professionals say their financial professionals never discuss CEFs.

By learning about CEFs and sharing their opportunities for potentially boosting income and returns, financial professionals can gain a competitive edge in the industry while better serving their clients. To learn more about CEFs, explore an article detailing the opportunities they offer investors.

It is important to consider the objectives, risks, charges and expenses of any fund before investing. Investing in closed-end funds involves risk; principal loss is possible. There is no guarantee a fund’s investment objective will be achieved. Closed-end fund historical distribution sources have included net investment income, realized gains and return of capital. Leverage typically magnifies the total return of a fund’s portfolio, whether that return is positive or negative, and creates an opportunity for increased common share net income as well as higher volatility of net asset value, market price, and distributions. There is no assurance that a fund’s leveraging strategy will be successful.

Nuveen Securities, LLC, member FINRA and SIPC


Forbes Insights is the strategic research and thought leadership practice of Forbes Media. By leveraging proprietary databases of senior-level executives in the Forbes…

Forbes Insights is the strategic research and thought leadership practice of Forbes Media. By leveraging proprietary databases of senior-level executives in the Forbes community, Forbes Insights conducts research on a wide range of topics to position brands as thought leaders and drive stakeholder engagement.