Closed-End Funds in Emerging Markets - dummies

By Consumer Dummies

Open-end mutual funds are far more common than closed-end funds. With a closed-end fund, the fund holds an initial public offering. The amount of money raised becomes the initial net asset value of the fund. The fund managers then go to work finding great places to invest the money. If the fund’s shareholders want to sell their funds, they do so through their brokers. If new investors want to buy into the funds, they place an order — just as they would for any other publicly traded stock.

The pricing of closed-end funds

In open-end mutual funds, the shares are issued and redeemed by the fund company. The mutual fund’s price per share is its net asset value (NAV). That’s the total value of the fund’s investments divided by the total number of shares outstanding. Every night, the fund company buys and sells shares so that anyone who wants to get into — or get out of — the fund can do so at the net asset value.

The closed-end fund company posts its net asset value every night, but the share price may be very different. In most cases, the share price is lower.

In academic finance theory, market prices are accurate because they reflect all known information about an asset. This is known as the efficient markets hypothesis. It’s plenty controversial; one of the known deviations from market efficiency is that closed-end funds almost always trade at a discount from their net asset value. If markets were really efficient, then a closed-end fund’s price would be the NAV.

Many people are scared of closed-end funds because of the price discount, which may be one reason that there’s a discount in the first place. However, closed-end funds may be a great choice for you as an emerging market investor because the manager of a closed-end fund doesn’t have to worry about money going into or out of the fund — the number of shares is already fixed. That means she can invest in securities that don’t trade very often, giving her more ways to make money in a market with thin trading. She can think about the long-term value of the assets, rather than her short-term cash management concerns.

Some emerging market closed-end funds

The Closed-End Fund Center, a membership organization for managers of closed-end funds, lists 18 different closed-end emerging funds. The following table offers a sample of the membership. Check these funds out before you invest in them!

Closed-End Fund Type Ticker Symbol
Aberdeen Chile Country CH
Aberdeen Emerging Markets Smaller Company Opportunities Diversified ETF
Central Europe, Russia, and Turkey (managed by DWS
Regional CEE
Herzfeld Caribbean Basin Regional CUBA
India Fund (managed by Aberdeen) Country IN
Mexico Fund (managed by its own staff) Country MXF
Morgan Stanley East Europe Regional RNE
Templeton Dragon Fund Country TDF
Templeton Emerging Markets Regional EMF
Turkish Investment Fund (managed by Morgan Stanley Investment
Country TKF