What exactly is a closed end fund?

Closed‐end funds (CEFs) are actively managed investment vehicles. Each fund has its own unique investment objective. Shares of CEFs are created through an initial public offering (IPO), after which they trade on a major stock exchange, similar to common stocks. As a result of trading on an exchange, CEFs will have both a market price and a net asset value (NAV). Market prices fluctuate based on supply and demand and typically trade above (premium) or below (discount) the fund’s NAV.*
(Source – Closed-end Fund Association website:


Advantages of CEFs

Discounts – The single most unique feature of closed-end funds is the ability to buy a dollar’s worth of assets for less than a dollar. Perhaps even more important though is that these discounts tend to be volatile rather than static. 1607 Capital’s core investment philosophy is built upon the ability to take advantage of this volatility.

Diversification – With a few exceptions, most funds in the  investable universe are diversified investment portfolios. Therefore, a portfolio with 50 to 90 funds might hold as many as 2000-3000 individual underlying securities, essentially eliminating any security specific risk.

Liquidity in illiquid markets – By only purchasing funds traded on the most liquid, highly regulated markets (U.S., U.K., Canada, and Australia), 1607 is able to bypass many of the liquidity constraints and regulatory restrictions that might exist in trying to purchase a portfolio consisting of all of the underlying holdings. This is of particular importance when buying funds that invest in less developed global markets.

Access to quality managers – While not every active manager in the marketplace offers a closed end fund, many do. Top quality managers range from the very large to the smaller boutique manager. The ability to invest with these quality managers at a discount can be very attractive.

Shareholder Protection – As publicly traded companies, each fund is governed by its own board of directors. Among other duties, this board is charged with protecting the interests of the shareholders. Since deeply discounted funds negatively affect the shareholders ability to recognize the full value of the fund, these boards have an obligation to address discounts as they stay wide. The result are corporate actions – share repurchases, tender offers, liquidations, etc. These corporate actions essentially act as a backstop to the risk of persistently wide discounts and provide another opportunity for discounts to narrow when market forces are not enough.

Lack of Investment Style Bias – At different points in the typical market cycle, different investment styles tend to outperform others (e.g. – growth vs. value). With abundant opportunities across the spectrum of investment strategies, we are able to favor funds with the best opportunity to outperform, with no bias toward a specific style.