Management Expenses and the Closed-End Fund Puzzle

Abstract

Closed-end funds bundle the eost of all future management services with the fund. Open-end funds do not. This difference between capitalizing or leasing management services is sufficient to produce a discount relative to reported net assets in closed-end funds. The discount persists because individuals who self-manage portfolios or who invest in open-end funds cannot escape future management costs. A discount equal to the capitalized value of this cost is an expected result. Panel data from a sample of twenty-three diversified closed-end funds for the period 1970-1990 provide supporting evidence. (012, 014)