Closed-ended structure

Investment companies are ‘closed-ended’, unlike unit trusts and OEICs which are ‘open-ended’. 

In an open-ended fund, money moves in and out of the fund as investors buy and sell. When investors buy, new units in the fund are created; when they sell, units are cancelled. So the fund has a variable pool of capital.

In a closed-ended fund, units are not created or cancelled whenever investors buy and sell. Instead, the shares are traded on the stock market. When you buy shares, you are buying them from another investor, not from the fund manager. There is a fixed pool of capital.

Open-ended fund (OEIC or unit trust) Closed-ended fund (investment company)
Variable number of units/shares Fixed number of shares
Units are created whenever investors want to buy, and cancelled when they sell The fund does not create or cancel shares in this way
You buy units from the fund manager You buy shares from another investor on the stock market
Units trade at the net asset value (NAV) Shares trade at the market price, which is usually different from NAV (at a ‘premium’ or ‘discount’)

Using a closed-ended structure has various implications:

  • Shares trade at a discount or premium to the value of the underlying assets. These discounts and premiums change over time, which can bring both opportunities and risks.
  • The managers of closed-ended funds can be confident that they will not be forced sellers if investors in the fund want to exit. This means they can invest with a longer-term view and do not have to sell assets into falling markets.
  • For the same reason, closed-ended funds are well suited to investing in illiquid assets, such as private equity, physical property or infrastructure projects.
  • There is no risk of an asset manager suspending trading in the shares of an investment company, as there is for open-ended property funds, for example.