What is a closed-end fund?

Ian de Lange of Seed Investments explains the difference between a closed end fund and a unit trust.

Closed end funds are very similar to mutual funds – typically run by a professional investment firm, but where the shares trade on a stock market. This means that a closed end fund has a permanent capital base that does not increase or decrease as new investors put money in or existing investors liquidate.

How does this differ from a unit trust?

This differs from a typical unit trust (mutual fund), where shares or units are created with daily demand and liquidated with investor redemptions subject to certain restrictions. 

What is the major caveat with closed end funds?

One of the biggest factors that an investor needs to look for is the liquidity of the shares in the secondary market. Unlike a mutual fund where the management company is obligated to redeem units on liquidation, shares in a closed end fund can only trade in the secondary market. Invariably there is no obligation on the promoters of the fund to make a market in the shares.

Trading at a discount

The closed end nature leads to the share price trading at either a small premium or a discount to the underlying net asset value. Investors will want to look to invest when the discount materially widens up.

Two examples of listed traded funds in South Africa would include anew closed end fund – accessed by way of listed preference shares – will be listed tomorrow – RECM and Calibre Limited. It has placed 45m preference shares in a private placement. It has a wide mandate to invest across listed and unlisted equities.

Foord Compass trades on the JSE as debentures. This vehicle invests in listed equities, bonds, foreign equity etc.

Other companies that may not be classified as investment trusts in the strictest sense in that that are more akin to active investors, include:

Hosken Consolidated Investment (HCI) is a R10 billion company with investments in media (eTV), hotels, gambling, and until recently Clover.

Brimstone is a company with investments in LifeHealthcare, Sea Harvest, Oceana, Rex Trueform, and Aon Insurance.

Remgro – a diversified industrial conglomerate, entrenched in the psyche of SA investors.

Reinet – global offspring of Remgro.

Sabvest with various listed and unlisted investments.

Ultimately the investment case comes down to the management team running the investment trust or company and the various investments that they both make and exit over time that will drive up value.  As with any investment, investors need to do the relevant due diligence before investing.