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By Steven Pikelny | 04-04-2012 11:00 AM

Income Generation Top-of-Mind for CEF Investors

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 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.

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