Closed-End Market Contracts

The pace of closed-end fund mergers and conversions to open-ends has increased and there have been just four new launches in the past six months. "It is that much more visible because we are seeing a contraction of new funds and not seeing funds replace them," said Cecilia Gondor, executive v.p. at Thomas J. Herzfeld Associates.

Latest figures from the Investment Company Institute show assets in the closed-end fund industry were $314.94 billion at the end of 2007 falling $10.61 billion during the fourth quarter. Gondor said that 23 funds were either liquidated, open-ended or merged into ETFs or other closed-ends in 2007, compared to 16 in 2006. There have been no closed-end fund launches since January, when there was one initial public offering.

Some officials believe that further mergers are necessary, even in the absence of new launches. "We have too many funds--we need to consolidate," said Paul Williams, managing director at Nuveen Investments. He said that many closed-end funds duplicate other offerings.

As the industry contracts, firms are focused on finding ways to fix the auction rate preferred securities market. "The funds are spending so much time finding a solution to the liquidity crisis that they've put everything on the back burner," said Gondor. Evergreen Investments had planned to launch two funds before ARPS troubles began in February, said Karen McColl, head of investment product management.

"We will be living with this for a long time. We've got a lot of wood to chop here," said Steve Baffico, director of strategic initiatives at BlackRock, which recently said it would merge three of its closed-end funds. It has no plans for launches.

Williams, McColl and Baffico were speaking at the 7th Annual Capital Link Closed-End Fund and Global ETF Forum. 

More stories from Fund Action