CLOSED-ENDED FUNDS

Example of the Discount at Work

On January 1 you buy a share with an NAV of 100p at a discount of 10% = 90p market price

On December 31 you sell the share with an NAV of 120p at a discount of 15% = 102p market price

The NAV increased by 20p or 20% (100p versus 120p) but the share price increased by 12p or 13.3% (90p versus 102p). In this case the increase in the value of the underlying securities per fund share of 20% was not fully reflected in the increased fund share price because of the widening of the discount from 10% to 15%.

So far it has been assumed that there is only one class of share available in closed-end funds (ordinary - risk bearing). In fact, this is not the case (see Types of Closed-End Fund Shares).

There are different types of shares or loan stock available to investors seeking a lower or higher exposure to risk; to those seeking a higher income; or to investors seeking profit in the form of capital gain rather than income. The reference above to NAV, and hence to the possibility of a discount or premium arising does not apply to all classes of share; only to those having a claim on the residual assets of the fund, and not to shares entitled only to a stated amount of capital unless even that fixed amount of capital is perceived to be at risk. For example, a share might only return the face value of the share to the investor on redemption or liquidation of the fund.