Although past results don’t necessarily predict future performance, management’s track record likewise provides the best insight into a closed-end equity fund’s ability to deliver the goods in a variety of market environments.
Like their bond-focused brethren, these investment vehicles also trade on major exchanges at prices that don’t necessarily reflect the net asset values of the stocks in their underlying portfolios.
Closed-end equity funds pay their dividends from a combination of investment income–supplemented with leverage–and the proceeds from the sale of any portfolio holdings. Yields are net of management fees and other costs.
The biggest difference between closed-end bond and equity funds: The latter’s NAVs tend to track the operating results of the names in their underlying portfolios, while bond funds are hostages to changes in interest rates.
Some investors might be surprised to learn that well-run closed-end equity funds face less pressure on their dividends than bond-focused fare.
A closed-end bond fund’s investment income is the difference between its cost of funds and the returns putting this capital to work. Prevailing interest rates and the shape of the yield curve–the difference between short- and long-term interest rates–influence a closed-end bond fund’s borrowing costs and what it earns on its investments.
An equities-focused fund will also feel the pain from the uptick in borrowing costs that accompanies rising interest rates. But unlike bonds and other securities that pay a fixed coupon, stocks offer upside exposure to revenue and earnings improvement via price appreciation and dividend growth.