You need to focus on the following points: – Definition of a closed-end fund and its main characteristics. – Closed-end fund industry in Canada (structure regulation, redemption, size, fees, key statistics) – The discount on CEF and potential theoretical and empirical explanations of this discount – Presentation and performance analysis of Dividend Select 15 Corp (TSE: DS) since inception and in the past 5 years (you might need to consult Fundata database in the library)——-******(note: please make charts from 2012-2016) – Trends/future in the CEFs industry #81488408

Closed-end funds (CEF) in Canada
Institutional affiliation

Definition of a closed-end fund
A closed-end fund is a form of investment model that entails the issuance of irredeemable fixed number of shares over a specified period. As a type of mutual funds, a closed-end fund is an investment whereby the manager is the one who oversees the sales of shares. The operating capital for a closed-end fund is raised through an initial public offering which operates in a similar way as stock and exchange. It should also be understood that a closed-end fund raises its initial capital by all the initial shareholders raising a specified amount of money. The rest of the operating capital can then be raised through the sales of the accumulated shares at specific times in the fiscal year. Therefore the initial shareholders are the ones who sell and buy shares from each other or selling the shares in bulk to other multinational companies. Notably, the shareholders in this fund are not allowed to redeem the shares like what happens in open end funds. The shareholders cannot even act as borers or intermediaries on behalf of their own shares. This means that the closed end funds sell shares at the prevailing market prices which are usually evident in the exchange rates.
Main characteristics of closed-end fund
Benefits accrued from the discounts offered
Usually, closed-end funds trade operates by offering huge discounts to the shareholders. These discounts are calculated in relation to the underlying value of the net asset. Market demand among other actors usually leads to high market demands which make it a viable investment and as such investors usually capitalize on the price appreciations by buying a large number of shares.
Efficiency is evident in the manner in which closed end funds maintain a fixed number of shares especially after the initial public offering. This means that the shareholders will be able to buy a fixed number of shares and therefore in any shareholders that will conduct any unscrupulous business since all the shareholders are perceived to be equal. Due to such equity shares, the managers are fully invested, and this is most suitable for a long-term investment option.
Price control
The most important aspect of price control as an entity of close-end funds is that they can be purchased at any day at the prevailing market prices. This is not applicable to the other mutual funds since the orders by the investors are only made at the close of business. The investors in closed-end funds, therefore, can comfortably control the prevailing prices of their shares.
Potential for the growth of income
According to many economist and market, analyst closed-end funds act as a cash flow generating vehicle since the shareholders can predict on the income, equity shares as well as the manner in which the dividends may stream in different market segments.
Market size
Closed-end fund trades in only huge sums of money. Therefore, it is not possible for the market to be flooded. Only a small percentage of worth shareholders will invest in closed-end funds. This means that since the market will not be flooded, the shareholders have the opportunity to ensure that the business conducted is legit and that there are no any unscrupulous business people. This, therefore, makes closed-end funds a worthwhile market investment option. It should be understood when the mallet is open to many people, the chances of having unfair and unhealthy business environment are high. As a result, unscrupulous business will, in turn, lead to the collapse of the business since the shareholders will lose trust and loyalty. The small, legitimate and reliable market size has to a large extent made it possible for the shareholders to continue to invest in a reliable market segment with the viable shares.
Closed-end fund industry in Canada
According to Starks, Yong, and Zheng (2006), closed-end funds offer a different platform for investors to acquire equity in regards to the prevailing market conditions. As noted earlier, the closed-end funds are not as popular as the open end funds which mostly operate inform of mutual funds. It should be understood that closed-end funds represent one of the major shares exchanges in Canada. Closed-end funds in Canada represent a particular form of portfolio that is managed only by a group of few investors particularly large scale investors. Therefore, a successful operation of closed-end funds must encompass a group of people with similar interests in regards to investment options.
In closed-end funds, shareholders only purchase shares once dirung the IPO. This means that the investors must but the shares from the market and not from the mangers. This allows the managers to acquire stable asset base since the high influx of shareholders ensure that there is always a continuous and reliable cash flows. At the same time in Canada, illiquid stocks which are attractive at some point can also be purchased since there are no fears of sales redemption due to the legit transactions of shares. Due to the liquidity guarantee of the closed-end funds, it is possible to trade in the shares even intraday and as such the investor may not have to wait until the close of the business.
It should be understood that apparently in Canada there are at least thirty closed-end funds that cover general market sectors across Canada. However, some of the specific areas where closed-end funds are traded include income trust oil and gas, bonds and precious metals. In all these sectors the Canadian government allows the closed-end funds to trade in their portfolio within the value rages of 10 to 30%. This discount is similar to purchasing a mutual fund at a low-end discount range. Purchasing binds at a discounted charge usually culminates into a lower asset value. This is the reason why closed-end bond fund usually yields higher benefits compared to the open end funds. According to the Canadian high yield bond, the closed end finds are usually applicable only to the investors who have invested heavily in the high-risk bonds. The closed end funds usually yield a minimum value of 13%. Therefore any investment amount would generate 13% of the total amount invested within the specified duration.
Key statistics
It should be understood that a closed-end fund is a high-risk bond. Therefore only the investors who have clear information and experience in bonds and securities invest in this type o bond. Apparently, most of the investors in this bond composed of senior citizens or foreign corporations that have the ability to overcome and manage the risks and losses. Other low income earning investors do not have the confidence to invest in closed-end funds.
It is important to understand the prevailing fees at any particular point before purchasing the sales bonds. The management expenses vary significantly with time-based on the cash flows and therefore it is important to scrutinize the fund prospectus. At times, the fees may even change within hours, and therefore if the investor is not keen, he or she may lose the total returns.
Notably, the closed-end funds accrue a discounted charge of over 30%. This is way above the open end funds. Therefore this makes it possible for the investors to purchase shares according to the prevailing process in the market and the economic situation in the country without necessarily consulting the managers. This means that when the economy of Canada becomes promising at any point of the year, investors can easily purchase shares and sell them when the economy begins to fall.
It is worth noting that the prices of shares in a closed-end fund deviate significantly from the net asset value(NAV). In this case, the shares will trade at high prices at one particular point. As such these shares will have prices higher than the overall net asset value. This would mean that the shares are trading at higher a premium rate. Conversely if the share prices o the closed end finds are lower than the net asset value, the shares are believed to be trading at a discount. At the point where closed-end funds are trading at substantial rates of discounts, compared to their net asset value, they usually offer viable opportunities for the investors to maximize and purchases these share on the cheaply discounted charges and sell them later.
The discount on CEF and potential theoretical and empirical explanations of this discount
The rationality of closed-end funds has been a topic of discussion over the years. As noted earlier CEF’S encompasses sponsoring a specific company by purchasing all its shares. Once the investor purchases the shares, the company is not obliged to sell its shares to other people. Over the recent past, the economy of Canada has been growing significantly, and therefore the supply and demand of shares have been increasing substantially. The simplest theoretical approach that the closed end funds utilize can be termed as a rent extraction tool that is used by sponsors towards naïve investors. The investors in the closed-end funds in Canada have continued to utilize the security and exchange commission’s reforms since 1992 (Starks, Yong & Zheng, 2006). Through the securities and exchanges platforms, the investors can either increase or reduce the discount levels depending on the country’s economy.
It should also be understood that CEFs particularly the ones with fixed income space tend to be illiquid and therefore it is not easy to determine the value of the assets. The opening of the illiquid shares has often led to an increment in the number f small-scale traders who invest in the CEFs bonds. Since the illiquid shares do not require the investors to display their asset values or wealth, the investors are opting to put their money in these bonds, and this is an act that has instigated the growth and development of CEFs bonds throughout different sectors in Canada.
Presentation and performance analysis
When investing in closed-end funds, it is paramount to wait until the fund starts trading at discounted rates since CEFs usually open their discounts at specific instances of the year. An investor should only purchase closed-end fund through the IPO only if he or she cannot access the collateral.
The most important thing in regards to investing in closed-end funds is the discounts. Therefore any investor should focus on the discounts since this is the only way to garner profits (Branch & Sawyer, 2010). Therefore an investor should never pay a premium for closed-end funds unless he or she is sure that he cannot invest the assets in any other mutual fund. Unlike the open-end funds, the performance history may be misleading, and therefore it is not a reliable of determining whether to invest in a closed-end fund. It is hard to predict the performance of CEF s based on what other investors have been experiencing in the industry. Therefore it is crucial to choose a fund based on the wider discount that the find is offering.
It is also important to pay attention to fees as an important entity while deciding on whether to invest in closed-end funds. The available fee charges determine the relative performance of closed-end funds at any given point. Notably, fees are based on the gross amount of assets but at the same time are reported inform of a percentage of the net assets. When the fee charges are more than the discounts, accrued then it is advisable for an investor to wait until the discounts charges are higher than the fees charged upon the initial investment portfolio.
It is also notable that you can increase your odds by analyzing and scrutinizing the turnover as well as the dispersion the shareholders as well as the percentage of the company ownership. Such factors go a long way in determining the number of discounts offered at any particular point (Anagol & Kim, 2012). If the company is large enough, then it is indisputable that the discounts offered are attractive.
The most common thing that any investor on CEFs should avoid is the issue of reported yields. Most of the shareholders calculate their yields by combining the net interests, the capital gains as well as the return of capital. However, when getting the exact yields, only the discounts accrued from the return of capital are viewed as the profits. For shareholders to get dividends, the operating capital must be returned to the investment. Therefore investors should not get lulled into the yields reported in the past performance.
Trends/future in the CEFs industry
The rate of taxes in regards to capital gains in the history of Canada has been high, and as a result, the government has over the years initiated numerous regulations on the financial markets. This has often made it difficult for minor actors to have direct access to financial stocks. In the 1980’s when CEFs began in Canada, this was perceived as a cheap and viable way of helping personal investors to obtain diversification and long term financial benefits at a low cost. Apparently, Canadians and even foreign investors can acquire this form of financial diversification by purchasing the shares directly by themselves. The most important thing is that closed-end funds actively accumulate value and as such, they are able to motivate their existence. It is worth noting that today the CEFs discounts are high in Canada than in most parts of the world. As such, CEFs have become a viable platform for individuals to invest directly instead of using intermediaries to acquire mutual funds.
Today, almost all the publicly traded closed-end funds have a concentrated ownership meaning that most people in Canada have become majority owners in most industries that trade in closed-end funds. The managers are therefore determined to accrue the highest possible returns for CEFs (DUNNAN, 2009). As such, the future of the CEFS is promising, and many people are opting for the closed-end funds as opposed to the open end funds. In most sectors today, the closed-end funds have enabled the small-scale investors to obtain the possible economies of scale and as such the sectors are able to pull a huge investor base.
The government of Canada has ensured the investment companies are subject to tax advantages whereby the government only accrues a small percentage of the total amount of dividends earned at any particular point. This, therefore, shows that the government has created a viable environment through the closed-end funds can be traded in even by small-scale companies. This goes a long way in ensuring that even the low actors in the economy such as people earning low wages and salaries can invest in closed-end funds ( Ismailescu, 2008). Due to the tax advantage given by the government, the investment companies are also able to offer huge discounts to their investors. Looking at the fees, the structure of the investment companies the market conditions and the discount offers, it is evident that closed-end funds have a viable place in the Canadian market.

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Anagol, S., & Kim, H. (2012). The Impact of Shrouded Fees: Evidence from a Natural Experiment in the Indian Mutual Funds Market. The American Economic Review, 102(1), 576-593. Retrieved from
Branch, B., Ma, A., & Sawyer, J. (2010). Around-the-Clock Performance of Closed-End Funds. Financial Management, 39(3), 1177-1196. Retrieved from
DUNNAN, N. (2009). CLOSED-END MUTUAL FUNDS. ABA Journal, 74(11), 104-106. Retrieved from
Starks, L., Yong, L., & Zheng, L. (2006). Tax-Loss Selling and the January Effect: Evidence from Municipal Bond Closed-End Funds. The Journal of Finance, 61(6), 3049-3067. Retrieved from
Weiss, K. (2011). The Post-Offering Price Performance of Closed-End Funds. Financial Management, 18(3), 57-67. Retrieved from

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