Basic Introduction to CEF's
Description
This article is from the Investing Articles: Closed-end Funds series.
Basic Introduction to CEF's
Definition
A closed-end fund (CEF) is a publicly traded investment company. It collects money from investors through an initial public offering (IPO) and uses this money to invest in securities. The shares of a CEF trade on market exchanges like the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX).
The Organization of CEFs
A closed-end fund, as with other incorporated public companies, has a board of directors elected by the shareholders. The board appoints an investment advisor (and, possibly, sub-advisors) for investment research and portfolio management. The investment advisor employs a portfolio manager who is often assisted by a team of analysts and who makes the actual investment decisions, in accordance with the guidelines listed in the prospectus issued during the initial public offering and any amendments to it. The day-to-day administrative duties such as mailing shareholder reports or responding to shareholder concerns may be performed by the investment advisor, or a separate administrator may be employed.
Different Types of CEFs
CEFs offer a wide array of investment choices for the investor. Within equity CEFs (the focus of this service), there are:
- Diversified Domestic Funds.
- Though broadly diversified with US equities, these funds may emphasize a theme reflecting the portfolio manager's investment philosophy. There are growth funds (Jundt Growth Fund), value funds (Royce Value Trust), market timing funds (Zweig Fund), small cap funds (Morgan Grenfell Smallcap), blue chip funds (Blue Chip Value), venture capital funds (Equus II), and many more.
- Sector Funds.
- There are many CEFs focusing on individual sectors. Some focus on banking and financial stocks (First Financial Fund, Pilgrim Regional Bankshares), media related stocks (New Age Media Fund, Gabelli Global Multimedia), gold stocks (ASA Ltd.), environmental stocks (Alliance Global Environment), health care stocks (H&Q Healthcare Investors, Global Health Sciences), natural resources (Petroleum & Resources), and so forth.
- Single Country Funds.
- Many CEFs focus on the securities of a single country. Such funds include funds investing in India (the India Growth Fund, the India Fund), Korea (the Korea Fund, the Korea Investment Fund), Thailand (the Thai Fund, the Thai Capital Fund), Mexico (the Mexico Fund, the Emerging Mexico Fund), Austria (the Austria Fund), Spain (the Spain Fund, the Growth Fund of Spain), Germany (the Germany Fund, the Future Germany Fund), and many other countries.
- Regional Funds.
- Some CEFs focus on regions rather than individual countries. In addition,
to deciding which stocks to invest in, such funds also have to decide which
countries to invest in, and how much to allocate to each country. Examples
include funds focusing on the Latin American countries (the Latin American
Investment Fund, the Latin American Discovery Fund), European countries (the
GT Greater Europe Fund, the Scudder New Europe Fund), Asian countries (the
Scudder New Asia Fund, the Asia Pacific Fund), and African countries (the
New South Africa Fund, the Morgan Stanley Africa Fund).
Some regional CEFs may have a narrower focus: for example, the First Iberian Fund focuses on Spain and Portugal; and, the Templeton China Region Fund and the Jardine Fleming China Region Fund focus primarily on China, Hong Kong, and Taiwan.
- Emerging Markets.
- Some CEFs focus on emerging markets: the stock markets of developing nations. Examples include the Templeton Emerging Markets Fund, the Morgan Stanley Emerging Markets Fund, the Emerging Markets Infrastructure Fund, and the TCW/DW Emerging Markets Opportunities Trust Fund.
- Global Funds.
- Some CEFs take a global perspective and invest in the securities of US and international markets, varying their allocations as market conditions demand. Examples include the Worldwide Value Fund and the Clemente Global Growth Fund. Some global funds may invest according to a specific theme: for example, the Global Small Cap Fund focuses on small caps, while the Global Privatization Fund invests in companies that are being or have been recently privatized.
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