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CLOSED-ENDED FUNDS
Types of Closed-Ended Fund
Securities
Conventional Investment Companies
A conventional closed-end investment
company will have one class of shares (ordinary), possibly augmented
by loan stock or preference shares.
Ordinary Shares
The ordinary shareholders are
the real risk takers, only benefiting from the net income of the fund
after the loan stock and preference shareholders have received their
fixed return each year. Similarly, if the fund is forced into liquidation,
the ordinary shareholders are the last to be paid any capital after
the claims of creditors and preference shareholders have been met. For
the higher risk, ordinary shareholders stand to reap higher rewards
if the fund is successful, in the form of increasing dividends (income
distributions) and enhanced share value (capital gains).
Preference Shares
Although preference shareholders
are legally owners of the company, just like ordinary shareholders,
in practical terms they are more akin to lenders. Their "preference"
normally takes the form of a fixed dividend (payable before ordinary
shareholders receive a dividend - usually including any arrears of dividend
if applicable), and preference over ordinary shareholders as to repayment
of capital in the event of the company going into liquidation. Preference
shares are rarely issued nowadays as they are not perceived to be particularly
attractive to investors.
Loan Stock
Investors seeking a greater degree
of security might prefer to be lenders of money to a fund rather than
owners (shareholders). This will mean that unlike dividends which depend
on the availability of profits, the interest on the loan which is normally
set at a fixed rate of interest per annum (the coupon) is payable as
an expense of the fund on the due dates. Furthermore, if the fund should
be liquidated, the lenders are entitled to be repaid as creditors of
the fund and therefore rank before the shareholders. Loan Stock represents
a lower risk than shares and may be either unsecured or secured on the
assets of the fund.
