Management fees on closed-end funds (CEFs) are falling, leading to higher dividends for investors. Despite the misconception that CEF fees are high and should be avoided, many CEFs outperform ETFs even with higher fees. One example is the Western Asset High Income Fund II (HIX), which offers a higher return and dividend compared to the SPDR Bloomberg High Yield Bond ETF (JNK) despite higher fees. This reflects the value of personal connections in the bond world, which can give CEF managers an edge over ETFs.
BlackRock, a major CEF manager with $10 trillion in assets under management, has started slashing fees and raising dividends, setting a trend in the industry. While the initial impact on fund prices after the fee reductions was limited, some funds did see a temporary increase in payouts. CEFs are typically sought out for their high yields, averaging around 8%, rather than for capital appreciation, so changes in fees may not have a significant impact on the funds’ value. However, the relationship between fees and a fund’s discount to its net asset value (NAV) is important to consider when evaluating CEFs.
The response to lower fees and increased shareholder activism in the CEF industry indicates that fund managers will need to work towards lowering discounts, improving performance, and remaining competitive. Despite the pressure on managers to adapt to the changing landscape, managing a CEF remains a desirable job for portfolio managers. Investors may benefit from buying discounted CEFs that are actively working to reduce their discounts and enhance performance. Overall, the trend towards lower fees and higher dividends in the CEF industry is a positive development for investors seeking income-generating assets.
