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The Results Are In: What Makes CEF Investors Tick?

The results from our first CEF reader survey show a strong desire for increased CEF education. 

Cara Esser, 03/30/2012

In late January, we put together a survey to better understand you, our closed-end fund, or CEF, readership base. We wanted to get your opinions about CEFs in general, find out why you do or do not invest, and ask your opinion of Morningstar's CEF coverage. We appreciate the time that all participants took to respond to the survey. We read every comment, analyzed the results, and, in some cases, acted on suggestions. In this week's article, we highlight some of the findings.

A big takeaway from the survey is that many respondents want more CEF education. Both individual and professional investors alike noted a general lack of understanding and information as roadblocks to CEF investing. However, there was also a general unawareness about our purely educational CEF Solutions Center, which we believe provides a great resource for beginning, intermediate, and more advanced CEF investors. In addition, Mike Taggart and I spent the first year of CEF coverage speaking to the basics of CEFs and how to analyze and invest in them. Newer readers may benefit from taking a look at our article archives (here and here).

Another big takeaway was the desire for income. In our opinion, the current investing environment is great for CEFs. The baby boom generation is hungry for income to meet their financial needs in retirement. But, interest rates are low and inflation is leaving many traditional fixed-income investments with near zero, or worse, negative, yields. CEFs are more attractive and viable options than ever before.

Individual Investors
The survey was taken by both avid CEF investors and those who had minimal or no experience investing in CEFs. Most survey respondents identified themselves as individual investors and the remainder investment professionals.

An overwhelming number of individual investor respondents described themselves as self-directed investors whose main investment goal was to meet retirement needs. Income generation was a close second, not surprising as this is closely tied to meeting retirement goals. The most popular investment vehicles investors currently use to meet investment goals are individual stocks and mutual funds, followed by exchange-traded funds, and then closed-end funds. Most individuals identified themselves as buy-and-hold investors (holding longer than five years), but many said they hold securities until their investment goals are met, which could be both very short- and longer-term horizons.

Most respondents (65%) said they owned CEFs. (The survey was taken by people generally interested in CEFs, creating a bias towards this answer.) Of those owning CEFs, 35% responded that the funds make up to 5% or less of their total portfolio while 34% said CEFs make up between 5% and 19% of their entire portfolios. More than half of CEF investors generally own between two and five CEFs at any given point in time. Some avid CEF investors (6%) said they may own more than 20 CEFs at any one point in time.

To better understand the appeal of CEFs, we asked, "What attracted you most to investing in CEFs?" Given that most respondents are investing for retirement, it's not surprising that nearly 60% said that income-generation potential "mattered most." This was closely followed by the ability to purchase shares at a discount to net asset value. What mattered least? The ability to trade funds intraday. On the subject of trading funds, most individual investor respondents are not trading CEFs regularly: 37% said they traded about one holding every few months to one year for rebalancing purposes, and 27% said they buy once and hold for years.

When investing in CEFs, more than half of respondents prefer sector-specific fixed-income and domestic-equity funds. The least popular category among investors was alternatives (long/short funds, option overlays, currencies, and commodities), but it still accounted for 20% of responses. (For this question, investors were asked to choose each allocation type that they used.)

Cara Esser is a closed-end fund analyst at Morningstar.
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