Closed-ended and open-ended behave in different ways

This article is part of
Guide to closed-ended vs open-ended funds

Nick Britton, head of intermediary communications at the Association of Investment Companies says that gearing or borrowing can help improve performance over the longer term, but it could also make the downside worse in the short term if markets go down, which would lead to investors losing more money.

Mr Britton adds: “If markets go up, you are going to make more money. Gearing is another reason why investment companies are good for those longer term investors who have time to benefit from that gearing.”

This is one of the reasons why he believes that the closed-ended fund structure may be suitable for those who want to invest for the long term.

When it comes to the type of investors the funds could be suitable for, Mr Britton says it also depends on what the fund is investing in and what the most underlying assets of the fund are.

He adds: “Because of the shares being traded on the stock exchange, the share price can actually vary from the value of the assets in the fund.

“As discounts and premium change over time it introduces an element of volatility, which means it is better to take a long term view, when you invest in a closed-ended fund.”

The other kind of investor can benefit from the closed-ended structure, according to Mr Britton, would be somebody looking for income.

This is because investment companies are able to reserve income, so they don’t have to pay  out all the income they receive every year.

With the income they hold back they can pay it out at a later date when they need to.

 Mr Lloyd adds: “Both structures can make sense for investors, provided they are sensibly allocated as part of a wider portfolio. 

“It is worth mentioning that because closed ended vehicles can gear and trade at a premium or discount to NAV this could, potentially, mean that they may be slightly more volatile than their open ended equivalent. 

“On the other hand, those investors wishing to invest in specialist asset classes for example, infrastructure may only be able to access this via closed ended structures.”

Scott Gallacher, director at Rowley Turton says open-ended funds (typically in the form of pensions or Isas) are suitable for anybody who wants to invest but there is a vast range from the very cautious to very risky. 

He stresses the importance of ensuring that any funds chosen are appropriate for the client’s own risk profile.

Mr Pursglove says “the beauty” of Oeics is that they trade at a net asset value. 

“From a retail perspective, if you are a private investor, everyday there is a price for the underlying assets that represents what they are actually valued at in the market, so it gives you a true value on a daily basis.