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Yields Crank Up Closed-End Fund Fabrication

This year Nuveen Investments launched 18 new closed-end, fixed-income funds. Last year it launched zero.

The firm, known for its bond products, now has 77 closed-end funds and more are on the way. Spokeswoman Laurel O'Brien says the company will soon launch two new state municipal bond funds as well as a REIT (real estate investment trust).

Like other fund companies, Nuveen is capitalizing on a trend that makes closed-end, fixed-income products especially attractive to individual investors. This year has seen dozens of new closed-end launches from the likes of BlackRock, Merrill Lynch and PIMCO. Many of those firms indicate they will launch more closed-end funds this year, but they are reticent about discussing them because of SEC rules restricting promotion of funds during filing periods.

Fixed-Income Flourishes

As of June 30, there were 495 of the products in the marketplace with $123.3 billion in assets, according to the Investment Company Institute. The bulk of the assets is in bond funds, some $66 billion. Fund companies could be on track to outpace last year's figures of $134.5 billion in total assets for the 12-month period. During the past two months alone, there have been 22 such launches, said closed-end fund guru Thomas Herzfeld.

Fund companies generally find the products attractive because, with equity markets flat, investors are attracted to the higher yields closed-end products provide. Assets in the funds do not need to be kept readily available should shareholders choose to redeem. That means the funds can be leveraged, initially investing in short-term debt and then reinvesting in longer-term bonds with relatively high yields that can be distributed among shareholders.

As short-term interest rates decline because of a troubled economy, costs decrease and the funds produce higher yields, O'Brien said. "That provides for higher dividends back to investors," she said. "They sell well because of that."

Nuveen raised $2.7 billion in assets with its 18 launches year-to-date. The firm offered 12 new funds in the first quarter and six in the third. The funds have been marketed and distributed mostly through advisers, O'Brien said. She said Nuveen is asking intermediaries to tell their clients, "If you're looking for income, this is a nice vehicle and it might be worth your while to explore."

Apparently, that isn't a difficult proposition for investors. Herzfeld said higher yields make the closed-end bond funds easy to sell. "They're promising some fraction of a point higher than [investors] can get somewhere else," he said.

With short-term rates at their lowest in decades and investor interest still rising in fixed-income products, Herzfeld said the industry is likely to see a glut of new closed-end products in the coming months. "For the time being, the conditions are still favorable for further launches. There's an opportunity that still exists to bring them to market," he said. "I think we'll see some more."