Wed, 4 Apr 2012
A recent Morningstar survey found that current closed-end fund investors are using the vehicles for retirement income, but potential investors desire more education.
Steve Pikelny: Hi. I'm Steve Pikelny, a closed-end fund analyst with Morningstar. Earlier this year we conducted a survey to try and learn a little bit more about our user base. We set up the survey on our CEF tab on Morningstar.com. We tweeted it, and we sent out a few emails to some of our users. So, with me today is fellow CEF analyst, Cara Esser, and we're going to talk about some of the results.
Cara Esser: Thanks for having me, Steve.
Pikelny: So, Cara, who invests in closed-end funds?
Esser: We found that most closed-end fund investors manage their own portfolio. They are individuals not using advisors predominately. They are also buy-and-hold investors. So, they basically are selling to rebalance and are not necessarily trading funds intraday. We also found that most of them are retired and investing for retirement goals, which generally includes income generation. So, they are very interested in income-generation potential of all investments, specifically closed-end funds. We also found that the average closed-end fund investor owns between two and five closed-end funds in his or her portfolio at any given time, though there are a few investors that own as many as 20 at any given point in time. We also found that closed-end funds generally make up less than 20% of their entire portfolio, which is a fairly large number, but many chose the response of less than 5% of their portfolio was made up of closed-end funds.
Pikelny: At the end of the survey we had a comment section and even during the survey there were a few questions that asked about some of the motivations that these investors have for buying these funds. So, what exactly is so appealing to this demographic for investing in these vehicles?
Esser: Not surprisingly, because most of these investors are retired and looking for a retirement income, they are definitely concerned with generating enough income to meet these retirement goals, and that's the most attractive feature to them about closed-end funds. In fact, more than 50% of respondents choose income-generation potential as the most attractive closed-end fund feature. They also like being able to buy closed-end funds at a discount to net asset value, which goes hand-in-hand with the income-generation potential because if you buy the shares at a discount the actual distribution rate that you as an investor experience is higher. So, investors are hungry for income, they're looking for income, and they find closed-end funds to be a great opportunity to get these kinds of income generation that they need.
Pikelny: Right. There are a lot of investors out there who are of that age and are saving up for retirement, but they aren't investing in closed-end funds. Did we get any of those respondents?
Esser: We did. We sent the survey out to both closed-end fund investors and non-closed-end fund investors to get an idea of the people who aren't investing and why aren't they investing. The biggest reason not to invest in closed-end funds was that the respondents felt that they had limited information and knowledge about closed-end funds. They are complex vehicles; they are confusing to people who don't know a lot about them. So, the general avoidance of the asset class was basically because of the lack of information about closed-end funds.
But they also said that they would be enticed to invest in closed-end funds if they could learn more, and they also were attracted to the income-generation potential. So we saw this income trend throughout the entire survey.
Pikelny: So what sort of resources do we have for investors that aren't really so familiar with closed-end funds but do want to generate that sort of income?
Esser: We have a lot of great resources on the CEFs tab on Morningstar.com for beginning, intermediate, and advanced closed-end fund investors. The Closed-End Fund Solutions Center offers really good resources for people who know basically nothing about closed-end funds.
You can learn what's the difference between a closed-end fund, an ETF, and a mutual fund. You can learn about leverage, distribution rates, and all of the basics. It's the closed-end fund 101.
We also have really good solution centers for more advanced closed-end fund investors. So you can learn about using relative discounts and premiums to make investment decisions. You can learn about what to do if your fund has a rights offering, whether you should participate or not. Another good resource for beginning investors would be the closed-end fund weekly article archive, which is also housed on our CEFs tab on Morningstar.com.
The first year that the CEF team was up and running and writing articles, we really focused on the basics of closed-end funds. So we wanted to introduce this vehicle. We wanted to talk about why people might be enticed to invest in it and how to analyze different closed-end funds? We also put forth a lot of our opinions about the best practices within the closed-end fund industry. So for anybody who is interested in learning about closed-end funds, this is a great resource with which to start.
Pikelny: That's good. So, it seems like we have a pretty comprehensive resource for new investors?
Esser: We do. We put out a lot of really good information for beginning investors.
Pikelny: So in the comments section in the survey, did we get any other requests from people who might want to see more from our CEFs tab or on the individual pages?
Esser: We did. We asked for all of the respondents to include any kind of comments that they had about what we are doing. A lot of people requested two data points to appear on our CEFs tab pages. One is called undistributed net investment income, and one is the percentage of bonds invested that are subject to the alternative minimum tax. We have started to work with the data team to get those data points included on each closed-end fund quote page.
We also got comments about a closed-end fund income model portfolio, and we are working on that. We hope to launch it sometime in the near future. And of course, we always get comments about a closed-end fund screener, and we are in the process of working with the programmers and the data team to get the closed-end fund screener that's housed in many of our other products to sort of re-jigger it a little bit, if you will, to make it available on the website for free with all of our other closed-end fund resources.
Pikelny: Cara, thanks for helping to recap this survey. It was very interesting.
Esser: Thank you. Thanks for having me.
Pikelny: Thanks for being here. For Morningstar, I'm Steve Pikelny. Thanks for watching.