Closed-End Fund Key Concepts

Net Asset Value - Net asset value (NAV) is determined using the following formula:

NAV
(PER SHARE)
= Managed Net Assets - Fund Liabilities
Shares Outstanding

Market Price - Price at which fund shares trade, determined by supply (offers) and demand on an exchange. When demand for fund shares exceeds supply, the market price may be higher than its underlying net asset value. When there are more fund sellers than buyers (supply exceeds demand), the market price may decline to be lower than its net asset value. The market prices of closed-end fund shares may be tracked on financial websites using the fund's ticker.

Discount/Premium - Many closed-end fund shares trade at prices that differ from each fund's net asset values for a variety of fundamental and subjective reasons. For example, if the net asset value of a fund is $20, and the fund is selling on an exchange for $18, the fund's price is said to be at a 10% discount to net asset value. If the same fund is selling for $22, the fund's price is said to be at a 10% premium to its net asset value.

Premium or Discount = Market Price - NAV
NAV

There are many factors that influence the up-down movement in a fund's share price, including the fund's yield or distribution rate, portfolio performance, the demand for a popular strategy or manager, the fund's sponsor, the availability of timely fund information. This is commonly called trading at a Premium or Discount.

Dividends & Distributions - Closed-end funds distribute their earnings to shareholders in two ways. First, income dividends from interest or stock dividends are passed through to shareholders, net of expenses. Most funds, particularly fixed income funds, typically pay out income dividends monthly or quarterly.

Depending on the underlying portfolio investments, these distributions may be taxed as ordinary income, qualified dividend income (QDI), a combination of short and/or long-term capital gains, or return of capital.

Distribution Rate = Current Distribution, Annualized
Market Price
Distribution Rate on NAV = Distribution Rate, Annualized
NAV

Second, realized capital gains (net of current or carried realized capital losses) distributions are passed through to shareholders. Most closed-end funds make these distributions once late in the year. Some funds employ "managed distribution program", in which a portion of expected capital gains may be paid out with each regular (monthly or quarterly) distribution. Fund companies must seek and receive an exemption from certain SEC rules in order to use a managed distribution program, and must communicate estimates of the distribution sources with each payment.

Performance - Fund performance is usually measured as a percentage price increase relative to share price, and as total return on share price including distributions. Funds also may present fund performance based on net asset value (NAV) level changes and total return on net asset value including distributions. While it is more typical to measure performance in terms of its market price plus distributions, it is also acceptable to measure in terms of its NAV plus distributions. Distributions are included.

Leverage - Leverage is usually an intentional part of a fund's design and structure, using derivatives or borrowed money to invest in additional securities to increase investment exposure. See Understanding Leverage.

Regulatory Leverage = Debt + Preferred Shares
Regulatory Leverage % = Regulatory Leverage
Managed Assets
Effective Leverage =
Regulatory Leverage + Additional exposure from
leveraged derivative investments
Effective Leverage % = Effective Leverage
Total Investment Exposure
Managed Assets = Debt + Preferred Shares + Common Shares
Total Investment Exposure =
Managed Assets + Additional exposure from
leveraged derivative investments

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