Closed-end fund website » Help & support » FAQs
Please find below frequently asked questions.
What is a closed-end fund?
A closed-end fund is a publicly-quoted company that invests in the shares of other companies or in fixed-interest securities, unquoted securities, funds or property. The share price of a closed-end fund is determined by the supply and demand for its shares on the stock market. A closed-end fund has an independent board of directors who are responsible for looking after shareholders' interests.
Is there a difference between a closed-end fund and an investment trust?
Investment trusts are closed-end funds. Investment trusts are simply the UK-domiciled version of a closed-end fund; other closed-end funds are domiciled in jurisdictions such as Guernsey.
How are closed-end funds regulated?
Closed-end funds are quoted companies with boards of directors. In the UK they are subject to the listing rules of the UK Listing Authority established under the Financial Services and Markets Act and to the Companies Act.
What is a split capital structure?
Split capital funds are companies that issue two or more different types of share. The different types of shares in the company are designed to meet different investors' needs and typically provide either income or capital growth options. The structure tends to have a limited life with a fixed wind-up date. Income shareholders are entitled to all the income generated from the investments held by the company during its life whilst capital shareholders receive, at wind-up, the capital value of the company, including any capital growth achieved by the company over its life.
Typical share classes:
Zero dividend preference shares ("zeros")
Zeros have a limited life. They are set up with the aim of delivering a pre-determined capital return to investors when the wind-up date is reached. A zero's rate of growth is pre-determined by the company at launch. This means that even if the company performs better than expected, zero holders will only receive the predetermined redemption value set at launch date. Although the redemption value may be pre-determined, this is not a guaranteed return – if the company performs poorly, the company may not be able to pay out the pre-determined amount. You may make less of a profit than you expected or even lose part or all of your money. Zeros do not provide income so there is no income tax to pay. Zero holders are usually the first shareholders to be entitled to capital of the company at wind-up after the company has paid any prior charges including any bank debt. Any profit on the sale or redemption of a zero is taxable as a capital gain. This makes them tax efficient for people who pay income tax but who do not make full use of their annual capital gains tax allowance.
Ordinary shares
A share entitling its holder to a dividend if any are declared. Ordinary shares carry the residual economic value of a company. They carry rights to distribution of profits through dividends, to the surplus assets of a company on a winding-up and to votes at general meetings of the company.
Why do some funds have wind-up dates?
In most cases the whole fund has a wind-up date that coincides with the date when its zeros mature. At this point shareholders generally vote to decide whether the fund should be wound up or rolled over.
How are dividend dates and rates calculated and by whom?
Dates are set to provide a regular spread of income and are most likely on a half-yearly or quarterly basis. When a fund is launched the accounting reference date or year-end date is set. To some extent that will determine the payment dates. The amounts of the dividends will, in the case of a new fund or after a fund raising, be set by the investment manager in consultation with the brokers to the launch/issue based on the underlying portfolio and the objective of the fund.
What service does the board of directors for a fund perform?
The board is responsible to shareholders; it oversees the external relationships, principally the fund management relationship, to ensure that the fund's objective is met.
How do I invest?
Closed-end investment companies are quoted on a stock exchange. Therefore, the buying and selling of investment company shares is done via that stock exchange. There are various ways to invest in an investment company. You can go to a professional financial adviser, who will provide advice on what to invest in including the best way to access the chosen investments – either via direct holdings or via a wrapper product. If you are prepared to select your own closed-end fund you can choose whether to go direct to a stockbroker or an execution-only dealing service to buy the shares for you – the direct holdings route – or to approach a fund management group to invest via a wrapper product.