Open ended or closed ended funds

WinTogether

If anyone can help…

Which one is better to invest in?

Why would you invest in one structure versus the other?

Is there a particular advantage in using one over the other?

Thanks!

ColdIron

That is a very open ended question (see what I did there?)

There are quite a few differences but one is not universally better than the other any more than salt is better or worse than pepper. You would use the one that suits your particular goal and you may have more than one goal so use both

Rather than list all the differences read this, it has a US slant but the fundamentals remain true

https://www.investopedia.com/ask/answers/042315/what-are-primary-differences-between-closed-end-investment-and-open-end-investment.asp

One thing it doesn't touch on is costs in the UK. You will may pay stamp duty on purchases of Shares and Investment Trusts. Many, but not all, platforms are cheaper for closed ended instruments as they cap their charges

Do you have a more specific (or I suppose closed ended) question?

lr1277

I read that article and have some comments.

As far as I know, in the UK, any CGT tax  burden for trading within the fund is not passed onto the investor. Should you make a gain when trading the fund, then this is potentially liable to tax.

You need to check how your broker charges for closed ended funds which includes shares and investment trusts. You should compare these charges (both initial and ongoing) to the charges for an open-ended fund.

I can't remember the following exactly but for an open-ended funds that can generate more units as it receives more money, but that also means it might have to sell its holdings if there is a run on that particular fund and so needs to generate money to pay the investor.

With a closed ended fund, assets don't need to be sold if there is a run on the shares, but that doesn't mean the share price of the fund won't go down if there is a run on the shares.

My broker only charges buying and selling costs for holding shares and investment trusts with no ongoing costs. So I I prefer closed ended funds. As I said, you need to check your broker's charging structure.

The only thing I don't like buying is accumulation units. I don't know if these are limited to a particular fund structure. The reason is because in a general investment account, you are liable to pay tax on the added units. Obviously not a problem if the fund is held in a tax free vehicle like an ISA. Technically not a problem in my case because my broker in its annual statement to me, shows the income from accumulation units for me to enter in my tax return.

I suppose the other advantage of closed ended funds is they can be bought/sold anytime in the trading day. With an open ended fun, the buying or selling happens once a day, and if you place an order, the trade will take place at the next buying/selling time.

I suppose the flip side is also true. If there is buying on the closed end fund or a rush to sell, you may not get or pay the price you were expecting. The trade will at the market price to which you agree.

Hope that is clear.

ColdIron

lr1277 said:

I can't remember the following exactly but for an open-ended funds that can generate more units as it receives more money, but that also means it might have to sell its holdings if there is a run on that particular fund and so needs to generate money to pay the investor.

I think this is a critical difference between the two. The closed ended structure is far more suitable for illiquid investments, think property and perhaps hard to trade non investment grade bonds

It's hard to sell a bit of a commercial or retail building unlike a stack of Microsoft shares and it takes a lot longer

Most fund managers will keep a significant amount of uninvested cash on the side to handle outflows which works, until it doesn't

With a closed ended fund, assets don't need to be sold if there is a run on the shares, but that doesn't mean the share price of the fund won't go down if there is a run on the shares.

Exactly, you will make a loss but you can at least trade as unlike open ended funds they won't be shuttered. Think Woodford

My broker only charges buying and selling costs for holding shares and investment trusts with no ongoing costs. So I I prefer closed ended funds. 

Not many index trackers in your portfolio then?

The only thing I don't like buying is accumulation units. I don't know if these are limited to a particular fund structure. The reason is because in a general investment account, you are liable to pay tax on the added units. 

You are liable for gains or dividends regardless of Acc or Inc though I don't understand your point about 'added units'. The fund manager will create or destroy units to match inflows and outflows but this is transparent and of no consequence to you.

wmb194

ColdIron said:

One thing it doesn't touch on is costs in the UK. You will pay stamp duty on purchases of Shares and Investment Trusts.

London listed foreign domiciled companies including investment trusts don't attract stamp duty e.g., the ITs domiciled in Jersey and Guernsey.

ColdIron

Yes, I have some Guernsey domiciled ITs myself. Doh!

george4064

ColdIron said:

That is a very open ended question (see what I did there?)

There are quite a few differences but one is not universally better than the other any more than salt is better or worse than pepper. You would use the one that suits your particular goal and you may have more than one goal so use both

Rather than list all the differences read this, it has a US slant but the fundamentals remain true

https://www.investopedia.com/ask/answers/042315/what-are-primary-differences-between-closed-end-investment-and-open-end-investment.asp

One thing it doesn't touch on is costs in the UK. You will may pay stamp duty on purchases of Shares and Investment Trusts. Many, but not all, platforms are cheaper for closed ended instruments as they cap their charges

Do you have a more specific (or I suppose closed ended) question?

@ColdIron 's post above covers most of the points.

However something that has been missed (also missed in the investopedia link) is that closed ended investments, specifically investment trusts, have the ability to use gearing. In short, gearing allows trusts to borrow to invest and therefore giving you more exposure to the market than if you simply bought a different investment without gearing.

Personally, I like gearing as a long-term investor to enhance returns and happy to accept the extra risk & volatility it brings.

Similar to ColdIron, I won't list all the pros and cons of gearing but the link here provides a detailed explanation: https://www.blackrock.com/uk/solutions/investment-trusts/our-range/insights/why-use-gearing

lr1277

ColdIron said:

Not many index trackers in your portfolio then?

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The only thing I don't like buying is accumulation units. I don't know if these are limited to a particular fund structure. The reason is because in a general investment account, you are liable to pay tax on the added units. 

You are liable for gains or dividends regardless of Acc or Inc though I don't understand your point about 'added units'. The fund manager will create or destroy units to match inflows and outflows but this is transparent and of no consequence to you.

No index trackers in my portfolio.

As for accumulation units, infrequently I have seen posts on this board where the poster does not know how many accumulation shares/units they have gained so unsure how much if any tax to pay. As I said, my broker lists the gains and their value in their end of year statement, but I don't know if every broker does that. Edited to add: nor do I know if this information is available on a historic basis from each broker.

With income units you should be able to tease out your dividend income (or whatever their name) for tax return purposes.

So worth checking if your broker reports this information for you.

2nd edit: With accumulation units, at dividend time, your dividend is calculated and that value of units is added to your holding. As these added units are treated as income, they are liable for tax and may need to be declared on a tax return. So your broker might tell you that x units were added to your holding in ABC fund. But I am not sure how many brokers do that. So one day you have z units. Then the next day you have z + x units. This is for you to notice, keep track and record. You might also have to work out the value of the added units, depending on what your broker does for you. Then as I said, you might have to list them as part of your tax return.

masonic

Income units are certainly preferable to Acc for tax calculation purposes, but it is easy to determine how many Acc units are gained from income - the answer is always zero.

I'd always opt for Inc units outside of an ISA or pension, but Acc inside.

Also, broker information about capital gains is only accurate if you hold all of the relevant investment with that broker. Otherwise you need to take into account your actions elsewhere when calculating gains.

lr1277

Thanks @masonic. Would you mind explaining:

but it is easy to determine how many Acc units are gained from income - the answer is always zero.

Not sure I understand.

TIA

masonic

lr1277 said:

Thanks @masonic. Would you mind explaining:

but it is easy to determine how many Acc units are gained from income - the answer is always zero.

Not sure I understand.

TIA

Suppose you buy 100 accumulation units for £1000 and the fund has a yield of 5%. In a year's time, you will still have 100 units. The unit price, not the number of units, is affected by income.