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Closed-end funds can be a good fit for Abbott Laboratories employees looking for higher yields and diversification in their Retirement accounts - but you need to weigh the potential for higher returns against the risks with the help of an experienced advisor like myself - Wesley Boudreaux - of the Retirement Group, 'he said.
'Abbott Laboratories employees interested in closed-end funds should consider their investment goals and risk tolerance - consulting with a professional like Patrick Ray at The Retirement Group can help you sort through the maze of these funds.'
In this article we will discuss:
- 1. Closed-end funds - basics versus open-end funds.
2. The strengths and downsides of investing in closed-end funds.
3. Benefits of closed-end funds for income-seeking retirees in a low interest rate environment.
How Much Does a Closed-End Fund Cost?
Numerous Abbott Laboratories clients of ours ask about closed-end funds. An investment corporation called a closed-end fund pools funds from many different investors and invests them in stocks, bonds, and other securities. A fund generally issues a fixed number of shares and buys securities with the proceeds of an initial public offering (IPO). Its capital structure and number of shares are not yet known; the number of shares is fixed (this is why it is called closed-end). Every investor holds some of these holdings in shares.
Closed-end funds may be a good choice for retirees and pre-retirees who want regular income streams. Closed-end funds typically offer higher yields than traditional mutual funds because they are structured to invest in more assets such as real estate and commodities, according to a report by the Investment Company Institute (ICI) in 2021. Closed-end funds may also provide diversification and appreciation of capital. Retirees and pre-retirees should weigh investment goals and risk tolerance before investing in closed-end funds.
A fund's net asset value is its holdings value divided by the number of outstanding shares. Once it goes public, the fund trades on an exchange or the over-the-counter market just like any other security. A professionally managed closed-end fund can be diversified or non-diversified. Investing in the fund may also earn share price appreciation, dividend income and capital gains distributions if the fund sells individual securities at a profit during the year.
Closed-end funds - established in the nineteenth century - are often compared to mutual funds - more famous although younger - which are less well-known. The Investment Company Act of 1940 defines a closed-end company as 'any management company other than an open-end company' (such as a mutual fund). They are both categories of investment companies regulated by the Securities and Exchange Commission but have substantial differences. Abbott Laboratories employees might be curious about the differences and similarities of both types of funds.
Closed-end funds are much older than open-end mutual funds and there are far fewer of them; closed-end funds number in the hundreds, while open-end mutual funds number in the thousands. While a closed-end fund is different from an exchange-traded fund (ETF), there are some similarities our Abbott Laboratories could use understanding. A closed-end fund can invest like an open-end fund. But historically most closed-end funds were bond funds, the largest category being tax-exempt bond funds.
How Is a Closed-End Fund Different From an Open-End Fund?
And like most investment companies, a closed-end fund diversifies by investing in different securities. But we caution our Abbott Laboratories clients that diversification alone cannot deliver a profit or protect against loss. A closed-end fund also provides diversification but also professional management and a consistent investment objective. Like mutual funds, closed-end funds do not collect taxes at the fund level but pass those tax obligations onto shareholders.
The biggest difference between a closed-end and an open-end fund that we want our Abbott Laboratories clients to understand is that while an open-end fund must always be able to redeem your shares directly, most closed-end fund shares are traded on market exchanges and are generally not redeemed directly by the company issuing them. In a closed-end fund, the share count is set at the time of the IPO. Rather, an open-end fund issues and redeems shares daily-hence the name open-end-and the number of shares changes day to day - which affects the fund's net asset value (NAV).
Just like equities, closed-end funds move during the day - and their prices change throughout the day too. That is distinct from an open-end fund whose NAV is calculated only once per day after the markets close. If you want to sell your shares of a closed-end fund, the appetite of other investors to buy them will dictate how easy it is to do so and what price you will get.
Since closed-end funds trade on market exchanges, the market price of a share varies with market supply and demand. If demand exceeds supply, the market price for a closed-end fund's shares may be above its NAV, or net asset value, as the share is intrinsically valued. Demand may outstrip supply and closed-end fund shares may trade below their NAV. Some closed-end fund shares trade at a premium, most trade at a discount. This is not true of open-end funds, which will redeem your shares at NAV on the day you sell (or on the next closing day if you sell after 4 p.m.).
Joan buys 1000 shares of a closed-end mutual fund. She pays USD 14.50 a share. The NAV is USD 15.75. It amounts to Joan getting assets for USD 14,500. Joan sells her stock later for USD 16. She made USD 1,500 ($16,000 - USD 14,500) before transaction fees and commissions. Had she instead bought her shares at USD 16 and sold them at USD 14.50, Joan would have sold her portion of the fund for less than they were worth.
So how Is a Closed-End Fund Different from an Exchange-Traded Fund?
Some Abbott Laboratories clients wonder how closed-end funds differ from exchange-traded funds. Exchange-traded funds are much newer than closed-end funds. A closed-end fund may also technically be an exchange-traded fund. They both trade during the day on main exchanges. But today most ETFs are passively managed. The fund seeks to replicate a given index return as closely as possible. In turn, their market prices closely match the values of the securities in its portfolio, which track the index. Closed-end funds typically trade above or below their NAV.
Interval Funds
A closed-end fund that periodically offers its shareholders the ability to sell back some or all of its shares is called an interval fund. Shareholders notify the fund by a specified date if they want to accept the offer - usually every three to six months or annually - by that date. The actual repurchase will occur at a price determined by the fund's NAV on a specified date, usually shortly after the deadline for notifying the fund of a repurchase decision.
In contrast with many closed-end funds however, an interval fund possesses the characteristics of both closed-end and open-end funds. As with mutual funds, an interval fund might choose to maintain a price tied to the fund's NAV. And unlike many closed-end funds, shares of an interval fund can be priced daily. But because shares are not redeemed daily, the SEC classes them as closed-end funds.
The Strengths of a Closed-End Fund.
Shares in closed-end funds purchased at a discount represent some kind of leverage - the ability to profit both from rising values of the fund's holdings and from rising demand for the shares themselves. This leverage could boost your investment.
Some closed-end funds borrow money at relatively low cost and put it into higher-yielding securities. This can raise a fund's return if interest rates are falling or staying low. However, if interest rates go up or low-cost credit becomes unavailable, leveraged bond funds could underperform other bond funds that use no leverage.
A closed-end fund needs not hold cash for redemptions because it has a fixed number of shares. This capital may be used to try to increase investor returns. Because shareholders do not redeem shares directly, a manager need not sell assets to cover unexpected shareholder redemptions and can instead invest in less liquid securities.
A closed-end fund is not required to accommodate sudden inflows of capital from shareholders like an open-end fund does. Such unexpected inflows may require a fund to buy securities to invest the money - even if the manager thinks the market is expensive already; a closed-end fund manager has no such problem.
The board of directors for a closed-end fund might sometimes decide to convert the fund to an open-end structure. Suppose this happened, investors who bought shares at a discount to the NAV would profit from the difference between their discounted purchase price and the NAV of the new open-end fund.
Because closed-end funds are traded and priced throughout the day instead of just at the end of the business day, you control the price you pay when you sell and the timing of your sales.Closed-end funds have no minimum purchase requirements on the secondary market.It is because closed-end funds are traded on the secondary market; typically they have no marketing expenses like open-end funds do.
Tradeoffs with a Closed-End Fund.
A closed-end fund's market price may fall if investor demand decreases. Demand may decrease if the market perceives the fund or fund manager as bad or other market conditions exist outside of the fund. And the share price may drop despite the fund manager making smart investments and increasing the fund's asset value.
More closed-end funds can invest in illiquid securities than mutual funds - which can be problematic if the fund manager must sell the securities. An illiquid security generally is one that cannot be sold within seven days at the approximate price the fund uses to calculate NAV.
Because leverage magnifies losses as well as increases return, a closed-end fund that uses leverage might underperform an unleveraged fund when its strategy does not work as expected - for instance if interest rates rise or cheap credit contracts become available - as in a credit crisis. Buy-sell agreements could increase losses; if investor demand is down, your shares will drop too.
Even if the fund manager does a good job and the fund's assets appreciate in value, lack of investor demand could cause the fund's market price to drop below your purchase price and the fund's NAV. The fact that they trade at a premium or discount means closed-end funds can be more volatile than their open-end counterparts.If the board of directors issues new shares by way of a rights offering that would dilute the value of the existing shares, the fund can increase its capital.
A closed-end fund is exposed to the same market risks as any fund that invests in stocks or bonds - for instance, the risk that a bond will default, prepay or be called early; a company will go bankrupt; and that interest rates, inflation, credit availability, political or economic conditions, and/or currency risks will affect the fund's holdings.
Closed-end fund performance is less readily available than open-end fund performance. They are sometimes also less liquid.
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You buy a ticket to a limited-time show by investing in closed-end funds. A closed-end fund has a fixed number of shares just like a theater production has fixed seats. Those shares are sold and the show/fund is closed to new investors. Just as a popular play might draw huge crowds for tickets, a successful closed-end fund might draw significant investor interest and potentially better returns. Just as some shows are better than others, you should research and choose a closed-end fund that meets your investment goals and risk tolerance, however.
Added Fact:
A new study from Morningstar published in April 2023 concluded that closed-end funds could be a good fit for income-seeking investors at low interest rates. The study said closed-end funds that focus on high-yield bonds and dividend-paying stocks historically have offered higher yields than open-end mutual funds. This is especially useful for 60-something investors who want regular income streams in retirement. Open-end funds may provide better yields and diversification benefits than traditional retirement investments. (Source: Morningstar, April 2023)
Added Analogy:
Closed-end investing is like joining an elite club with a finite number of memberships. Like the club that gives members special privileges and amenities, closed-end funds offer investors a broad spectrum of investments. Every membership gets a piece of the fund's holdings, with potential gains for investors. As different clubs serve different interests, so too must investors research and select closed-end funds that meet their financial goals and tolerance for risk. Selecting the right 'club' or closed-end fund can provide income generation, potential capital appreciation and diversification for retirees and pre-retirees.
Sources:
1. Reaves Asset Management. 'Retirees: Keep Your Eyes on Income with CEFs.' Reaves Asset Management, https://insights.reavesam.com/blog/retirees-keep-your-eyes-on-income-with-cef?utm_source=chatgpt.com .
2. Investopedia. 'Closed-End vs. Open-End Investments: What's the Difference?' Investopedia, https://www.investopedia.com/ask/answers/042315/what-are-primary-differences-between-closed-end-investment-and-open-end-investment.asp?utm_source=chatgpt.com .
3. InvestmentNews. 'Why Anxious Retirees Should Consider Closed-End Funds.' InvestmentNews, https://www.investmentnews.com/retirement-planning/why-anxious-retirees-should-consider-closed-end-funds/222196?utm_source=chatgpt.com .
4. BlackRock. 'Five Reasons to Consider Closed-End Funds in Your Portfolio.' BlackRock, https://www.blackrock.com/us/individual/education/closed-end-funds/insights/reasons-to-use-closed-end-funds?utm_source=chatgpt.com .
5. Financial Planning. 'Closed-End Funds: From All Angles.' Financial Planning, https://www.financial-planning.com/news/closed-end-funds-from-all-angles?utm_source=chatgpt.com .
How does the Abbott Laboratories Annuity Retirement Plan (ARP) determine the eligibility requirements for employees, and how can potential changes in federal regulations impact these requirements? Employees of Abbott Laboratories may need to understand the nuances of eligibility, particularly regarding age and service criteria. Changes in laws governing retirement benefits could pose questions about continued eligibility and could affect when employees can begin pension payments.
Eligibility Requirements & Impact of Federal Regulations: Employees at Abbott Laboratories become eligible for the ARP by being part of a participating division, being at least 21 years old, and residing in the U.S. (with certain exceptions for U.S. employees abroad). Changes in federal regulations could potentially alter these eligibility criteria, especially since such rules often influence age and service requirements for retirement plans. Any changes in legislation regarding retirement benefits might necessitate adjustments in eligibility rules, affecting when employees can begin receiving pension payments.
Can you explain the significance of Vesting Service in the context of the Abbott Laboratories Annuity Retirement Plan? Employees often wonder how their years of service influence their benefit eligibility and the amount they can expect. Understanding the elements that constitute Vesting Service, and the implications of terminating employment before achieving vesting, is crucial for Abbott Laboratories employees planning for retirement.
Significance of Vesting Service: Vesting Service at Abbott Laboratories refers to the time an employee must accumulate to gain entitlement to pension benefits, irrespective of continued employment. This service is critical as it determines the security of an employee's future benefits and the degree of an employee's investment in the company's pension plan. Employees who terminate employment prior to achieving full vesting lose entitlement to accrued pension benefits, making understanding and accruing Vesting Service essential for long-term financial planning.
In what ways does the calculation of Final Average Pay play a role in determining retirement benefits under the Abbott Laboratories Annuity Retirement Plan? The methodology used to calculate an employee's Final Average Pay can significantly impact the retirement income they receive. Employees at Abbott Laboratories should consider how their earnings history and the inclusion or exclusion of certain payments factor into their anticipated benefits.
Role of Final Average Pay in Benefit Calculation: Final Average Pay (FAP) is crucial in determining the pension benefits under the ARP as it represents the average of an employee’s highest earnings over a specified period. Abbott’s ARP calculates pension based on a percentage of the FAP, multiplied by years of eligible service. This calculation means that higher earnings towards the end of an employee's career can significantly increase the pension benefits, incentivizing employees to maximize their earnings potential in their final working years.
What optional forms of payment are available to employees upon retirement under the Abbott Laboratories Annuity Retirement Plan, and how do these choices affect overall pension benefits? Abbott Laboratories employees need to evaluate whether to choose single or joint survivor annuities, among other options, as these decisions can have long-term financial implications for both themselves and their beneficiaries.
Optional Forms of Payment at Retirement: The ARP offers various payment options upon retirement, including single and joint survivor annuities, which affect the benefit's distribution and longevity. These choices impact financial planning for retirement, particularly in ensuring that a spouse or beneficiary may continue to receive benefits after the retiree's death. The selection between these options should align with personal financial needs and considerations for dependents' security.
Different employees may have varying perspectives on the importance of early retirement options offered by Abbott Laboratories. What are the qualifications for early special retirement, and how does this option affect retirement income? Employees contemplating retirement before the standard age should understand how factors such as age, years of service, and the specific provisions of the Abbott Laboratories Annuity Retirement Plan influence their benefits.
Early Retirement Qualifications and Impacts: Early retirement under the ARP is available to employees who meet specific age and service criteria, allowing them to retire with reduced benefits before reaching the normal retirement age. This option can significantly affect retirement income, depending on the number of years ahead of normal retirement age the employee chooses to retire, making it crucial for employees to understand the financial trade-offs involved in retiring early.
How does the Abbott Laboratories Annuity Retirement Plan ensure compliance with the Employee Retirement Income Security Act (ERISA), and what rights do employees have under this act? Abbott Laboratories employees should be informed about their rights regarding plan documentation, required disclosures, and recourse in the event of disputes pertaining to their retirement benefits.
ARP Compliance with ERISA: The ARP is designed to comply with the Employee Retirement Income Security Act (ERISA), providing employees with rights to information about plan features and funding, benefits accrual, and recourse in case of disputes. Compliance with ERISA ensures that employees' retirement benefits are protected under federal law, offering a framework for security and transparency in their retirement planning.
How do Abbott Laboratories employees who experience a medical leave of absence or disability maintain their retirement service credits under the Annuity Retirement Plan? Understanding the interaction between long-term disability benefits, medical leave, and retirement plan participation is essential for employees navigating health-related issues while planning for their retirement.
Impact of Medical Leave or Disability on Retirement Credits: Employees on medical leave or disability continue to accrue service credits under the ARP, ensuring that such periods do not adversely affect their pension benefits. This protection helps employees who are temporarily unable to work due to health issues maintain their trajectory towards earning full retirement benefits.
Given the potential for changes to the Abbott Laboratories Annuity Retirement Plan, how can employees stay informed about their rights and any modifications to the plan’s terms? Employees at Abbott Laboratories should have access to reliable communication channels, including how to receive updates about the retirement plan, which could impact their financial planning.
Staying Informed About Plan Changes: Employees can stay informed about changes to the ARP through regular communications from Abbott Laboratories, access to updated plan documents, and direct inquiries to the Abbott Benefits Center. Staying proactive in seeking information and understanding the implications of plan modifications is essential for effective retirement planning.
What processes should Abbott Laboratories employees follow if they wish to obtain a statement regarding their entitlement to a pension? Employees looking to plan for retirement need clear instructions on how to request this crucial information and understand its importance in their long-term financial strategy.
Obtaining a Pension Statement: Employees wishing to obtain a statement of their pension entitlements under the ARP should contact the Abbott Benefits Center. Clear instructions on how to request this information are crucial for employees to plan accurately for retirement and understand their accrued benefits.
If an employee at Abbott Laboratories has further questions about the Annuity Retirement Plan or requires clarification on the document contents, how can they effectively contact the appropriate department? Knowing how to reach out to Abbott Laboratories' Benefits Center regarding retirement plan inquiries is vital for all employees wanting to confirm their understanding or seek additional information about their retirement benefits.
Contacting the Appropriate Department for Plan Inquiries: For further inquiries or clarification regarding the ARP, employees should contact the Abbott Benefits Center. Knowing the correct contact information and how to reach out effectively is vital for resolving concerns and gaining a deeper understanding of their retirement benefits.
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