Three industry veterans give a behind-the-scenes look at how an investment idea reaches the market.
This article first appeared in the June/July 2011 issue of Morningstar Advisor magazine. Get your free subscription here.
The closed-end-fund business is on a roll. In 2010, there were $8.4 billion in net proceeds raised across 20 issuances--for an average of about $420 million per IPO. So far this year, seven closed-end funds have launched, attracting $2.3 billion, and the industry is on track to have an even bigger year in terms of the net proceeds.
With this flurry of recent issuances, I thought it would be interesting to dig into the process of how a closed-end fund is born. The IPO--perhaps the most controversial aspect of closed-end-fund launches--is just one component of a larger process of bringing a new product to market. To help explore this topic, I assembled a panel of experienced fund executives at the Capital Link Conference, which held its 10th annual meeting on April 27 in New York. Capital Link is the largest closed-end fund conference. Contributing to my panel were Bill Meyers, senior vice president of product development for Nuveen; Bill Golden, managing director of closed-end funds for Legg Mason; and Stephen Dougherty, CFA, head of structured assets and alternatives for ING Investment Management. Here is a transcript of our discussion. It has been edited for clarity and length.
Mike Taggart: Let's look behind the scenes a little bit of how a closed-end fund reaches the market. Most of us are aware of IPOs, but Bill Golden, can you walk us through the process of creating a new closed-end fund?
Bill Golden: The first thing you need to focus on before you bring out a new product is your secondary market support. Unless you are committed to supporting your fund after it's sold, you are not going to get a commitment from others to distribute the fund. Financial advisors aren't going to want to invest with you if they don't have confidence in your commitment to secondary market support. The underwriters aren't going to want to give you a calendar spot to bring a fund to market. And your sales folks aren't going to want to sell a product if you don't have an infrastructure to support it.
So, I don't think it's a surprise that my two colleagues here on this panel both received shareholder support awards and that they're active in the IPO market. The secondary market is an important element. It's important for us, and I think the fact that many of you are here shows that it's important to you, as well. So, I would start with good secondary-market support.
I think the magic, or really the challenge, of creating a closed-end fund is coming up with an investment strategy. You want a strategy that meets clients' needs, that is timely, and is different. We've launched a fair number of funds recently, and every one had a unique genesis. We had ideas that came to us. Portfolio managers called up and said, "Munis are screaming cheap. We should do a fund." And we start working on it.
We also look at what's happening in mutual fund flows for ideas. We look at how closed-end funds are trading as a sign of demand. We try to marry those up with our capabilities. That's where the ball gets rolling, and we have a beginning of an investment thesis.